SM Entertainment stock soars on breakup with founder Lee Soo-man

Lee Soo-man, founder and chief producer of SM Entertainment / Courtesy of SM Entertainment

By Baek Byung-yeul

SM Entertainment’s stock price skyrocketed by more than 18 percent, Friday, on its announcement that the K-pop company will terminate a seemingly “bizarre” contract at the end of this year, through which it has paid tens of billions of won annually to Like Planning, a private firm wholly owned by its founder Lee Soo-man.

The company’s stock price hit 76,500 won on Friday, up 12,000 won or 18.6 percent from the day before.

“Our company received an intention for early termination of the producing contract from Like Planning and is currently reviewing the proposal. If the matter is confirmed through the board’s meeting, we will disclosure it without delay,” SM Entertainment said on Thursday in a regulatory filing.

Investors interpreted the statement the company filed to the Financial Supervisory Service as signaling that the founder will quit his role as a chief producer at SM Entertainment.

To deliver a clearer message to shareholders, the company said, Friday, “with the 25-year-old production system Lee established running well, he is confident that good junior producers will manage without much difficulty. He added it is also reasonable to humbly accept minority shareholders’ opinions to step down (as chief producer).”

The singer-turned-music producer established the company in 1995 and has produced numerous pop stars and bands such as H.O.T, S.E.S, BoA, Shinhwa, TVXQ, Super Junior, Girls’ Generation, Shinee, Exo, NCT and aespa, playing a significant role in expanding the presence of Korean pop culture to countries around the world.

However, Lee also has been criticized by investors for undermining shareholder value. SM Entertainment has paid more 10 billion won each year to Like Planning, which is 100 percent owned by Lee, who also has the largest stake in the entertainment company.

SM Entertainment paid 24 billion won ($17.2 million) to Like Planning in 2021 and 12.9 billion won in 2020. As of June 30, Lee is the largest shareholder of SM Entertainment, holding 18.46 percent.

Regarding the criticism, SM Entertainment had claimed that the contract with Like Planning can be recognized as fair because the chief producer has supervised various business activities ranging from recording songs to providing advice to the entertainment company. But the company had to accept the shareholders’ opinions that the governance issue caused by Lee is undervaluing the company.

“SM Entertainment’s profit structure is likely to improve when the contract with Like Planning ends,” said Choi Min-ha, a researcher at Samsung Securities. “It will not only improve performance of the company, but also positively affect stock prices.”

The researcher also suggested 95,000 won as the target price of the company.