This article was displayed on the ChosunBiz MoneyMove site on Aug. 18, 2025, at 4:06 p.m.
SM Entertainment (SME) has decided to merge its subsidiary, SM Studios, which oversees non-music businesses, approximately four and a half years after its establishment. The planned sale of entertainment agency KeyEast and SM C&C under SM Studios has been delayed more than expected, leading to the interpretation that SM Entertainment aims to simplify its governance structure first.
According to investment banking (IB) industry sources on the 18th, SM Studios is set to be absorbed by its parent company, SM Entertainment, on Oct. 3. As SM Studios is a wholly-owned subsidiary, the merger ratio is 1 to 0, with no new shares issued and no share buyback rights granted. SM Entertainment noted that the purpose of the merger is "to create synergy through the integration of management resources, achieve management efficiency, and enhance business competitiveness."
SM Studios, established in 2021, serves as a sort of intermediate holding company overseeing non-music affiliates. SM Entertainment transferred its stake in other companies to the newly established SM Studios through an in-kind investment. This move made SM Studios the largest shareholder of KeyEast, along with advertising agencies and management companies like SM Culture & Contents (SM C&C), fandom platform company DearU, Mystic Story, and SM Life Design Group. In other words, SM Entertainment holds 100% equity in SM Studios, which in turn operates KeyEast and SM C&C as subsidiaries.
At that time, SM Entertainment explained that it was taking measures to maximize management efficiency by focusing more on its core music business while the newly established SM Studios would develop media content businesses unrelated to music, including dramas, entertainment, and new media. However, it was revealed that SM Entertainment had been engaged in large transactions with Lee Soo-man's private company, Like Planning, during a period when shareholder dissatisfaction was growing.
The subsequent situation did not turn out as expected. In 2023, founder Lee Soo-man stepped down, and SM Entertainment, now integrated into Kakao Group, announced its "SM 3.0 management strategy." The main content aimed to secure 1 trillion won in investment resources by selling non-core businesses and assets unrelated to its main operations. KeyEast and SM C&C were identified as representative non-core assets, indicating a reversal of the management strategy within two years.
However, the sale process is also progressing slowly. Earlier this year, a consortium comprising local private equity fund management firm Cheongdam Investment and KNT Investment sought to acquire KeyEast. The fact that KeyEast, which recorded consecutive losses in 2022 and 2023, returned to profit last year with 600 million won was seen as a positive factor. However, the deal eventually fell through after major strategic investor Asia Holding Company withdrew its investment. Currently, SM Studios is contacting other potential buyers to revive the sale process, while KeyEast recorded an operating loss of 1.2 billion won in the second quarter.
SM C&C is also struggling to find buyers for a year. Although it began distributing teaser letters (investment brochures) to formalize the sale process last year, the poor performance in the advertising agency and management sectors piled up. SM C&C's consolidated revenue was 157.9 billion won in 2022, 127.3 billion won in 2023, and 109.9 billion won in 2024, decreasing for two consecutive years. Its net profit also recorded losses for two consecutive years, with an operating loss of 1.3 billion won and a net loss of 1 billion won in the second quarter.
Accordingly, the industry believes that SM Entertainment opted to simplify its governance structure before completing the sale process. In this case, SM Entertainment could directly receive the proceeds from the sale of non-music affiliates like KeyEast without a complicated process. Currently, the sale proceeds would go to SM Studios, the selling entity, which could then be transferred to SM Entertainment through dividends.
An industry insider said, "SM Studios has recorded net losses of 18.5 billion won in 2023 and 16.8 billion won in 2024, leaving it without the ability to pay dividends. The delay in the sale has led to a reordering of priorities, starting with the elimination of the intermediate holding company. Once the parent company becomes the selling entity, negotiations with potential buyers will likely gain momentum."