Korean pop music’s irresistible international growth has triggered a bitter corporate battle that is reshaping the country’s entertainment industry, as rivals battle for control of its most storied talent factory.

Market leader Hybe, the company behind megastar boy band BTS, last week bought 15 per cent of its main rival SM Entertainment from the country’s best-known K-pop impresario, SM founder Lee Soo-man.

Hybe wants to increase its stake via a tender offer to other investors and argues it can create a national entertainment champion, capable of taking on US giants Universal Music, Warner Music and Sony Music.

Lee Soo-man, a septuagenarian “super producer” who reportedly had been long opposed to selling to his main competitor, changed his mind after a spectacular falling out with SM’s board. It had disowned him last month over allegations of tax evasion and improper influence over company directors.

Led by Lee Soo-man’s nephew, the board has instead pursued an alliance with the entertainment subsidiary of local tech giant Kakao, which announced a deal earlier this month to buy a 9 per cent stake in the company.

Describing his ousting as a “military operation”, Lee Soo-man, who holds no formal position within the company, has filed an injunction to block Kakao’s share purchase.

The K-pop industry had long been dominated by three music agencies — SM, JYP and YG Entertainment — before BTS rose to global stardom and made Hybe the sector’s dominant player.

“This is like if Real Madrid tried to buy Manchester United, then at the last minute Manchester City decided to throw its hat into the ring,” said Bernie Cho, president of DFSB Kollective, a digital media marketing and distribution agency based in Seoul and Los Angeles.

While Hybe’s market capitalisation of Won 7.9tn ($6bn) dwarfs SM’s Won 2.9tn valuation, analysts argue that the larger company remains over reliant on BTS. The band’s seven members, most of whom are in their late 20s, recently went on hiatus in order to complete their compulsory military service.

SM, by contrast, is seen as having a much more diversified portfolio, with its artists generating strong sales in overseas markets including Japan, China and south-east Asia. In 2022, the company reported a 38.5 per cent rise in operating profit as sales rose 20.9 per cent to Won 848bn.

“For Hybe, the key is to diversify its content,” said music critic Kim Young-dae. “SM has been a role model of Hybe for a long time, so taking over the company was an opportunity Hybe could not miss out on.”

But SM is also hotly coveted by Kakao, which is engaged in a struggle with arch-rival Naver to acquire content that will drive users to a new generation of distribution platforms.

Kakao Entertainment’s proposed alliance with SM mirrors a similar tie-up between Naver and SM rival YG Entertainment, the company behind girl group sensation Blackpink. Naver is also working with Hybe to co-develop online concert and fandom portals.

“Kakao Entertainment needs to boost its corporate value before a future public listing, and SM is the perfect M&A candidate to strengthen its artist portfolio,” said Jeong Kwang-woo, an expert in the Korean music industry.

SM’s board strongly objects to what it describes as Hybe’s “hostile takeover”. Hybe has submitted a tender offer to purchase a further 25 per cent stake from minority shareholders, which would bring its stake to 40 per cent.

That would give Hybe effective control of SM despite holding a stake of less than 50 per cent, because of the number of shareholders who do not vote or engage in the running of the company.

Daniel Jang, SM’s chief financial officer, told the FT that Hybe’s control of SM in this way would result in a “blatant conflict of interest”.

“When there is tension between the interests of Hybe and the interests of SM, Hybe’s management can either serve the interests of Hybe shareholders, or the interests of SM shareholders — but they can’t serve both,” said Jang.

Hybe denies engaging in a hostile takeover. In an open letter published on Wednesday, the company’s chief executive Jiwon Park said that under its proposals, “Hybe will actively support SM artists’ endeavours in making a presence in the global music industry”.

Opponents of the Hybe takeover have also raised competition concerns. Analysts estimate that Hybe and SM together would account for two-thirds of K-pop album and digital music sales.

Another key question for shareholders at SM’s annual meeting next month will be whom they trust most to clean up the governance issues left behind by the company’s founder, who retains a 3.65 per cent stake.

Earlier this month, SM’s co-chief executive Chris Lee released a video statement explaining why the board had broken with the mogul.

In addition to allegations of tax evasion and financial mismanagement, he accused Lee Soo-man of using a tree-planting campaign in Saudi Arabia and Mongolia as a front for building an overseas K-pop-themed property empire replete with hotels and casinos.

Lee Soo-man’s legal representatives have denied the allegations. The FT was not able to reach him for comment.

In his statement, Hybe chief executive Park pledged that “SM will be moving to become a company with a transparent governance structure that prioritises shareholder value”.

But SM’s CFO Jang argued that Hybe could not be trusted to implement governance measures, citing what he described as Hybe’s own poor governance record.

“Hybe has announced governance measures for SM that it does not follow within its own company,” said Jang. He said SM’s board deserved credit for breaking with Lee Soo-man, whom he described as having behaved like an “emperor” as he exerted his influence from behind the scenes.

“Hybe’s transparency and excellency of its governance structure is undoubtedly the model to follow in the industry,” a Hybe spokesperson told the FT. “Nevertheless, we continue to look for room for further improvement.”

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