Hyosung Chairman sells SM Entertainment stake to HYBE

The conglomerate disposes of shares secured through a strategic partnership seven years ago and gains 19 billion won in profit

SM is also the second-largest shareholder of Galaxia S.M, which allows for the possibility of a stake cleanup.

Galaxy S.M., a KOSDAQ-listed company affiliated with Hyosung Group, participated in the tender offer of SM Entertainment conducted by HYBE and handed over a stake of about 1%.

This is the first time in about seven and a half years that the company has disposed of its entire stake in SM Entertainment, which it acquired through a strategic alliance with SM Entertainment in 2015 in the form of a mutual stock exchange. On the other hand, SM still holds a stake (12.64%) in Galaxia S.M., so the future direction of its handling is in the spotlight.

Galaxia S.M. is the largest shareholder (22.41%) of Trinity Asset Management, where Hyosung Chairman Cho Hyun-joon holds an 80% stake. Mr. Cho also holds a stake (11.35%) in Galaxia S.M. himself. This shareholding structure suggests that Mr. Cho was involved in the decision to transfer SM shares to HYBE. 

On March 2, Galaxia S.M. announced that it transferred all 238,813 shares (0.98%) of SM shares held in the tender offer conducted by HYBE for 28.756 billion won. 

In August 2015, Galaxia SM acquired 237,153 shares of SM for 9 billion won through a third-party allotment capital increase and acquisition of old shares. The issue price for new shares (170,4029) was 37,350 won per share, and the acquisition price for old shares (63,124) was 39,330 won per share.

At that time, SM forged a strategic alliance by issuing new shares to Galaxia S.M. (then known as Ivy Worldwide), a sports marketing company, to develop the sports entertainment market that combines entertainment and sports. 

After seven and a half years, Galaxia S.M. disposed of all the shares at the tender offer price of 120,000 won per share, realizing a pre-tax gain of approximately 19 billion won.  

The company explained that it disposed of the shares to improve its financial strength. The company is currently borrowing 18 billion won in short-term loans from financial institutions such as KB Securities and Woori Bank.

A representative of Galaxy S.M. said, "We transferred the SM Enterprises shares to repay the borrowings held by the company," adding, "We participated in the tender offer to sell at a fixed price in a situation where it is difficult to predict future stock price movements."

However, Galaxia S.M.'s transfer of SM’s shares to HYBE, its alliance partner, may have other consequences in the current management battle. 

SM also purchased a stake in Galaxia S.M. (12.64%) in the form of a share exchange for a strategic alliance at the time, which it still holds. SM's current management has announced the sale of 'non-core assets' to secure investment funds for the 'SM 3.0' strategy. Since the partners have sold their stakes, it is unlikely that their stakes are 'core assets'.

Meanwhile, with the announcement of Galaxia SM's participation in the tender offer, the results of HYBE's tender offer have also attracted attention. It is widely believed that HYBE would not have been able to purchase the targeted number of shares (5,951,826 shares, or 25% of the total outstanding shares) as SM's stock price exceeded 120,000 won during the tender offer period until Feb. 28. 

HYBE, which conducted a tender offer along with the acquisition of a 14.8% stake in former executive producer Lee Soo-man to take over the management of SM, stated that it would buy all of the shares even if it fell short of the target number. 

By Corporate Korea