SM Entertainment shares halved since Kakao takeover, as Lee Soo-man laughs all the way to the bank

Producer Lee Soo-man and A2O MAY, the Chinese girl group he launched [SNS]

"They said the shares would hit 300,000 won ($211) once Lee Soo-man was gone."

Three years after Lee Soo-man, the founder of SM Entertainment, sold his stake and Kakao took over, the K-pop giant's share price has been in freefall — defying the optimism that once surrounded the high-profile acquisition.

Shares that once topped 160,000 won have collapsed to the 60,000–70,000 won range, actually lower than the 70,000–90,000 won levels that critics once blamed on Lee's opaque management style.

The dramatic decline has prompted talk that Lee may have been the real winner of the bitter control battle over SM Entertainment. He sold his shares at 120,000 won apiece, walking away with more than 500 billion won.

Kakao poured 1.2 trillion won into the acquisition three years ago, paying 150,000 won per share. Having financed the deal partly through overseas fundraising, the company now finds itself in an awkward position as the share price has cratered.

The collapse accelerated after Lee completed his share sale and exited the company.

Compounding Kakao's troubles, founder Kim Beom-su was acquitted at trial on charges of market manipulation during the SM Entertainment acquisition, but prosecutors have appealed and the case is still ongoing. The company has been hamstrung by legal risk for three years running.

Aespa, SM Entertainment's flagship girl group [SM Entertainment]

During the control battle, SM Entertainment's management confidently projected that removing Lee would unlock sales of 1.8 trillion won and operating profit of 500 billion won by 2025.

Executives boldly declared that a share price target in the 300,000 won range was "by no means an impossible figure" — a boast that has since come back to haunt them.

Analysts attribute the share price collapse largely to slowing growth across the domestic entertainment industry. Album sales — a key revenue driver for K-pop agencies — have been declining, and a stock market rotation toward semiconductors and large-cap names has left entertainment stocks behind. Price targets across major entertainment companies have been cut in a string of downgrades.

LS Securities lowered its target price for SM Entertainment from 140,000 won to 120,000 won, trimming its earnings outlook for the company this year.

Samsung Securities also cut its target, reducing it from 114,000 won to 105,000 won.

"Although album and music sales declined, second-quarter earnings beat market expectations thanks to strong concert, merchandise and licensing revenue, as well as improved results from consolidated subsidiaries," said Choi Min-ha, an analyst at Samsung Securities. "In the second half, the key variable for medium- to long-term earnings and valuation will be whether Aespa's world tour can expand the fandom in Western markets."

SM Entertainment posted consolidated second-quarter sales of 349.6 billion won and operating profit of 52.9 billion won, up 15.4 percent and 11 percent, respectively, from the same period a year earlier. While the results held up reasonably well, growing doubts about the company's growth trajectory have kept the share price pinned near its lows.

park@heraldcorp.com