South Korea’s Kakao buys 9.05% stake in K-Pop giant SM Entertainment worth $172.8m

South Korea-based Kakao Corp has acquired a 9.05% stake in K-Pop giant SM Entertainment.

South Korea’s Kakao buys 9.05% stake in K-Pop giant SM Entertainment worth $172.8m

According to Reuters, Kakao is buying its stake in SM Entertainment – which is behind stars like NCT, EXO and Aespa – in a deal worth 217.2 billion won ($172.8 million).

Kakao Chief Investment Officer Bae Jae-hyun is quoted by Reuters as saying: “We hope to work together in competing in the heavily contested global music and content market through this investment”.  

Kakao’s investment in SM Entertainment comes a month after Kakao Corp subsidiary Kakao Entertainment secured 1.2 trillion South Korea Won (approx $966m) investment from what it said were “leading sovereign wealth funds”.

Today’s (February 7) news also coincides with the announcement that SM Entertainment will establish several production centers and a label system for the first time since the firm was established in 1995.

The move was unveiled by co-chief executive officers, Lee Sung Soo and Tak Young Jun, in a video uploaded on YouTube on Friday (see below).

In a presentation published alongside the video, SM said it aims to become a global entertainment company that is “focused on fans and shareholders” from 2023 and beyond.

Back in December, the company confirmed plans to establish a Southeast Asian headquarters in Singapore as part of its global expansion.

The company, whose roster includes K-Pop stars like SUPER JUNIOR, Girls’ Generation, SHINee, EXO, Red Velvet, KANGTA, BoA, TVXQ!, NCT and aespa, said it focused on global expansion of the K-Pop culture from the 2010s and early 2020s.

Under its latest growth strategy, dubbed SM 3.0, SM says it will set up five new production hubs and several music labels at home and overseas. The plan is aimed at systematizing the production process for artists.

Reuters reports that SM says the funds raised through the Kakao deal will fund this new strategy.

“The biggest changes that will come with the new system is the establishment of multi-production centers, multi labels and a subsidiary specializing in publishing music,” co-CEO Lee Sung-su was quoted by Korea Joongang Daily as saying in the video message.

The latest model will see SM operating via a number of production centers with their own A&R, management, music video, artwork and PR and marketing teams. This way, SM will be able to expand its music coverage by ensuring creative autonomy, the company says.

“We have realized the limits to producing and managing the intellectual property [IP] that meets the demands of the market and fans,” Lee added.

SM says that the multi-production center approach will allow each unit to independently make decisions based on their business performance, while also enhancing specialty on their own intellectual properties and cost efficiency.

Each production center will also manage IP throughout an artist’s career including planning artists concepts in pre-debut stage. The production centers will plan and manage artists based on their deep understanding of the market and fans, says SM.

SM also expects the new model to maximize its IP profitability as the multi-production centers will facilitate IP transfer to multi-internal labels.

“Our focus with SM 3.0 is on marking ourselves down as a global entertainment company centering on the fans and shareholders. We promise to communicate more actively with the fans and shareholders with SM 3.0, starting with our multi-production and label system,” co-CEO Tak Young-jun was quoted by Joongang Daily as saying.

The SM 3.0 strategy is widely seen as an attempt to reduce the company’s dependence on its founder, Lee Soo-man, amid tensions between him and the group’s shareholders.

In October 2022, SM cut ties with Like Planning, a private company that Lee owns, over concerns about the agency paying billions of South Korean won annually to the firm.

Lee is set to determine his fate as chief producer of SM when the company holds its next general meeting in March. A feature documentary about Lee’s life is in the works at Amazon Prime Video.

Park Seong-guk, an analyst at Kyobo Securities, said SM 3.0 will likely improve the company’s earnings and increase shareholders’ trust, Joongang Daily reported.

“In addition to the independence of the board and normalization of its relationship with its affiliate company, the multi-production system is expected to have a positive influence on the company’s earnings in the mid-to-long-term,” Park was quoted by Joongang Daily as saying.

In the third quarter of 2023, SM posted a 65.4% year-over-year jump in revenue to 238.1 billion South Korea won (USD $189.9m), driven by a 76.1% increase in the revenue of its ‘MD/Licensing’ business unit.

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