Asian Junkie Asian pop. Without discretion.
Earlier this month it was revealed that two major stakeholders in SM Entertainment were preparing an open letter demanding transparency from the company, and in response SME were considering offering dividends.
Now it’s been revealed that it’s been demanded that SME merge with Like Agency, the company owned by Lee Soo Man at the center of the controversy revolving around suspicious financial transactions. It’s also been demanded that SME provide dividends and shutter the company’s food and beverage arm.
S.M. must respond by June 20 to these and other demands by KB Asset Management, which has publicly called on Like Agency — a private company owned by Lee — to be merged with the entertainment firm in order to keep intact the corporate value of the Kosdaq-listed firm. KB Asset is also demanding more dividends of up to 30 percent of net income and shutting down the firm’s unprofitable food and beverage operations.
Why does SME have to care about these demands? Because the stakeholder owns enough of the company to essentially bog them down in a proxy war.
KB Asset became the third-largest shareholder with 7.59 percent stake with a series of stock purchases since April via KB Shareholder Value Focus Fund. Other institutional investors also appear to have racked up S.M. shares. According to disclosures, Mirae Asset Global Investments owns 5.01 percent of S.M. as of June, while Korea Investment Value Asset Management bought 5.13 percent stake in March. This implies that KB Asset can carry on a proxy battle against Lee, who owns 19.04 percent stake, if it teams up with institutional investors, plus the second-largest shareholder National Pension Service. Korea Investment Value Asset Management has already joined forces. KB Asset has a track record of shareholder activism, and has sent open letters to companies like Come2us and Hyosung TNC. Previously, it won a lawsuit against Golfzon.
The activism is relevant to this controversy, as they feel the controversy represents a lack of control on the part of SME’s board of directors.
“We see that S.M.’s board of directors lack control over business management,” KB Asset said in an open letter to the firm on June 5, adding it would ramp up checks and balances by recommending a new candidate as external board member in the forthcoming shareholders meeting.
As you may have noticed, the deadline for SME to respond was over a week ago, and I was going to wait on covering this until the answer was revealed. However, I have not been able to find any sign of SME’s answer, if there was any at all.
Seems worth monitoring going forward, and it’s interesting in that this could help SME going forward by getting their shit together.
S.M. shares have been rising since the initial news report on May 30 about KB Asset’s demands. Mainly backed by strong local institutional buying, its share price soared 21.6 percent from May 30 through June 14. Over the cited period, institutional investors net purchased 1.1 million shares.
Market watchers say the proposed merger and normalization of F&B business will lead to S.M.’s improved performance. According to market tracker FnGuide, S.M.’s projected operating profit this year can shoot up to 88.1 billion won, from its previous projection at 53.8 billion won, as long as it accepts KB Asset’s calls.
Basically it’s confidence that this shareholder activism might protect SME from itself and result in a better run company. Hopefully they listened then.
Update
Reports are saying that SME is taking steps towards meeting KB Asset Management‘s demands.
SM Entertainment, South Korea’s largest K-pop powerhouse by market cap, has finally surrendered to growing demands from shareholders long disgruntled by its stingy dividend policy and began taking on shareholder-friendly steps. According to sources on Wednesday, the company’s board recently held a meeting to discuss measures to win back the confidence of investors. Probable measures include dividend payment and share buyback and cancellation to increase shareholder value. If SM pays out dividends, it would be the company’s first dividend payments in 18 years since its founding.
Sources say SM is considering cutting royalty payment to Like Agency. Like Agency receives 6 percent of SM revenue as royalty and an axe in the fee would help improve SM’s cash flow. SM’s royalty paid to Like Agency last year was 14.5 billion won. Regarding the request to shut down the company’s unprofitable food and beverage operations, SM remains careful, sources said. The company rather wants to sell its stake to minimize any impact on current business.
Money talks, folks.
