CELLPHONES – Xiaomi On Steroids With New Funding, Tie-Ups
Bottom line: Xiaomi’s new $1.5 billion funding is smaller than expected but gives it a strong valuation, as its small investments in Youku Tudou and iQiyi look like a smart way to quickly build up its product ecosystem.
There’s no shortage of news this week on hyperactive smartphone sensation Xiaomi, which is showing up at least 3 major headlines as it lands major new funding and explores potential tie-ups with China’s top 2 online video sites as well as faded smartphone pioneer BlackBerry (Toronto: BB). I almost have to catch my breath after writing all of that, as any one of these 3 stories would normally qualify as major news. The fact that all 3 are coming at the same time testifies to Xiaomi’s ability to do big deals, and its charismatic CEO Lei Jun may soon take the title for China’s most hyperactive tech leader from the current holder of that title, Alibaba (NYSE: BABA) founder Jack Ma.
All that said, let’s jump right in and begin this Xiaomi round-up with the biggest headline in dollar terms, which has the company on the cusp of raising $1.5 billion in new capital. (English article) This particular fund-raising was first reported a week ago, but this is the first time we’ve seen an actual amount of money being raised. Not surprisingly, one of the investors in this new round of funding is Russia’s Digital Sky Technologies (DST), which was a previous investor and is also a big fan of China tech companies.
The reports only say the new funding values Xiaomi at more than $40 billion, which implies the amount may be in the $40-$45 billion range. If that’s the case, it would mark a minor setback for the company, after figures in the earlier reports said the company could be valued as high as $50 billion. Still, that’s not a bad figure for a company that was valued at just $10 billion during its last funding round a year ago when it raised $2 billion.
It’s slightly surprising that this latest funding is smaller than the one last year, since such funding amounts typically climb with each new round for fast growing companies like Xiaomi. But if the company sold 20 percent of itself in the last round and is now about to sell another 3-4 percent, perhaps its trying to conserve shares for future investors and also its eventual IPO.
Next let’s look at the second major headline that has Xiaomi in discussions to buy stakes in China’s 2 largest online video sites, Youku Tudou (NYSE: YOKU) and Baidu-owned (Nasdaq: BIDU) iQiyi. (English article; Chinese article) The reports are quite detailed and one even comes from a leading Chinese financial newspaper, which leads me to believe the talks are really happening. One says Xiaomi will invest $300 million in the 2 companies, and that deals are aimed at helping it to secure content and services for its products.
Assuming the $300 million would be evenly split between Youku Tudou and iQiyi, Xiaomi’s stake in both companies would be relatively small — probably in the 3-6 percent range, based on my own calculations using Youku Tudou’s latest market value. These particular investments look relatively smart for Xiaomi, since they are relatively cheap and will quickly help to build up an ecosystem around its products.
Finally there’s the report that says BlackBerry CEO John Chen has made recent visits to both Xiaomi and leading PC maker Lenovo (HKEx: 992) as he searches for partners to help save the dying former smartphone pioneer. (English article) This is the least exciting of the 3 big headlines, though it’s noteworthy because it involves 2 major smartphone brands headed in exactly opposite directions.
The fact that Xiaomi’s Lei Jun and Lenovo CEO Yang Yuanqing were both willing to meet with Chen means these 2 Chinese companies believe there might be at least a small chance for cooperation. An acquisition looks highly unlikely since Canada previously expressed national security concerns over such a deal. I would advise both companies to avoid any tie-up, though it’s possible the lure of the BlackBerry name could attract Lenovo, which has shown a recent fondness for over-the-hill western brands.
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