BUYOUTS: Kingsoft Writes Down 21Vianet, Xunlei Stakes

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Bottom line: Kingsoft’s write-down in the value of its investments in 21Vianet and Xunlei could auger a sale of its stakes in both companies, following a failed privatization bid for 21Vianet and little hope for a Xunlei recovery.

Kingsoft writes down 21Vianet, Xunlei investments

A week after data center operator 21Vianet (Nasdaq: VNET) became the second US-listed Chinese company to abandon its privatization bid, one of the financial backers that was leading that bid is providing some hints at what led to its actions. That’s my interpretation of the new disclosure from software maker Kingsoft (HKEx: 3888) saying it has written down $125 million related to slumps in the values of its investments in 21Vianet and also in struggling online video downloading site Xunlei (Nasdaq: XNET).

Neither write-down comes as a huge surprise, since shares of both 21Vianet and Xunlei have fallen sharply since Kingsoft made its investments. But what’s potentially more revealing is the timing of this announcement. Kingsoft was part of a group trying to privatize 21Vianet, with an eventual goal of re-listing the company in China at a higher valuation to recoup some of its earlier investment. But it formally abandoned that plan last week (previous post), and this new write-down hints that it may be preparing to sell its 21Vianet stake.

All that said, let’s take a look at the actual news and discuss what it might mean for 21Vianet and also separately for Xunlei. Kingsoft invested $172 million for about 13 percent of 21Vianet in December 2014, as part of a group that also included its sister company Xiaomi. Since then the stock has lost about half of its value, translating to about $86 million in lost money on Kingsoft’s original investment.

There’s not much additional detail in Kingsoft’s new announcement, which simply gives the $125 million figure for provisions it’s making for a write-down in the combined value of its investment in the 21Vianet and Xunlei. (company announcement; Chinese article) Kingsoft simply said it was making the move due to the “prolonged decline in the market value of the investments.”

But the bigger implication is that Kingsoft didn’t see any hope for a rebound in either company’s share price anytime soon. Last week 21Vianet announced the withdrawal of its privatization plan that counted Kingsoft as one of the main backers, becoming the second to abandon its bid among around 40 Chinese companies trying to de-list from New York and return to China.

New Buyout Bid Coming?

I said at the time that bid’s withdrawal reflected bigger problems at Kingsoft’s sister company Xiaomi, which also backed 21Vianet and Xunlei and has gone into cash conservation mode recently due to its own struggles. At the same time, 21Vianet was strengthening an alliance with a group of companies at the prestigious Tsinghua University, which has been on a global buying spree lately for high-tech companies. Thus one might interpret Kingsoft’s latest provisions as a prelude for the sale of its 21Vianet stake, which could be part of a new privatization bid led by Tsinghua.

Next let’s look quickly at Xunlei, which received a more modest $90 million in investment from Kingsoft in April 2014. Like the 21Vianet deal, Kingsoft also made its investment in Xunlei as part of a larger group in funding round led by Xiaomi. Xunlei went public a couple of months later, and its shares now trade at less than half the IPO price. That would translate to a loss of about $45 million in market value on Kingsoft’s investment, which accounts for the rest of its $125 million in new provisions.

Like the case with 21Vianet, this latest move hints that Kingsoft may be preparing to sell its stake in Xunlei, which is one of China’s last remaining independent online video operators. That could also hint that Xiaomi might be preparing to sell its Xunlei stake as well, which was worth a much bigger $200 million at the time.

The news certainly doesn’t look too good for Xunlei, since there doesn’t appear to be any white knight like Tsinghua that could come and buy its shares from Xiaomi and Kingsoft. That could put some downward pressure on the already embattled stock if the 2 big investors do decide to dump their stakes by selling shares on the open market.

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