Baidu, TCL TV Tie-Up: Equity Swap Ahead?
Let’s start the day with a look at the latest Internet TV tie-up between leading TV maker TCL Multimedia (HKEx: 1070) and online search leader Baidu, the latter of which has suddenly discovered a huge appetite for similar new partnerships. I need to start off by saying that anyone who didn’t see this latest tie-up coming must be living in a cave, as media previously reported on it a few weeks ago and TCL chief Li Dongsheng has been talking about it non-stop on his microblog these last few days. I’ve previously said that I like this deal for reasons I’ll recap shortly (previous post); but now that the deal is official, what’s more intriguing is the potential for a stronger tie-up in the future, including a potential equity swap or even a purchase of TCL Multimedia by Baidu.
Before we get into the longer range implications, let’s take a look at the actual deal that will see Baidu’s iQiyi video sharing service team up with TCL to make Internet TVs. (English article; Chinese article) The initial product will be a 48-inch TV that goes on sale today, costing 4,567 yuan ($750). A second cheaper model costing about 3,000 yuan will go on sale in November. Separate reports say TCL is also rolling out a new smartphone with Baidu, following Baidu’s similar previous launch of models with Dell (Nasdaq: DELL) and Changhong (Shanghai: 600839). (English article)
I said in my previous analysis that this tie-up looks smart, as it combines 2 leading players in their respective spaces in an emerging field with huge growth potential. TCL is already one of China’s top TV makers and enjoys a strong reputation for quality products, and iQiyi controls about 17 percent of China’s video sharing market, second only to Youku Tudou (NYSE: YOKU). Both companies have plenty of money and expertise to give the new tie-up the resources it needs to succeed.
Internet TV looks particularly well-placed for growth in China, where the traditional TV sector is highly fragmented and local TV stations are slow-moving creatures due to monopoly status in their home markets. That kind of environment should be fertile ground for Internet TV companies, which could use China’s increasingly fast broadband Internet networks to offer strong rival products to traditional cable TV. The big potential in the space has already attracted names like LeTV (Shenzhen: 300104), Xiaomi and Lenovo (HKEx: 992), all of which have developed Internet TV products.
All of that said, let’s take a look at the longer-term implications for this tie-up that I’ve already mentioned above. It’s still too early to say if the partnership will succeed, since product design will be a key element to whether or not people buy the TVs. But assuming the product enjoys modest success, which seems likely, I could easily see Baidu and TCL enhancing their cooperation through an equity swap.
Baidu’s founder Robin Li and TCL’s Li Dongsheng are both savvy businessmen who would see the benefits of such a tie-up, which would combine Baidu’s strength in Internet products and services with TCL’s strengths as a hardware maker. We saw a similar pairing earlier this week, when software giant Microsoft (Nasdaq: MSFT) announced plans to buy Nokia’s (Helsinki: NOK1V) cellphone business.
The tie-up I would envision could see Baidu buy a major stake in TCL Multimedia, which itself is controlled by Shenzhen-listed TCL Corp (Shenzhen: 000100). TCL, in turn, could take a minority stake of 10 percent in Baidu, which would cost it around $4.5 billion based on Baidu’s current market value. Of course all of this depends on how the partnership progresses; but if it moves ahead smoothly I wouldn’t be surprised to see this kind of an equity tie-up announced by the end of next year.
Bottom line: Baidu’s Internet TV tie-up with TCL looks like a smart move, which could be followed by an equity swap between the 2 partners by the end of next year.
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