INTERNET: Baidu Break-Up Continues with Video Spin-Off

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Bottom line: Baidu’s spin-off of its professional video service continues its plan to separate newer loss-making units from its core search business, and could fuel strong profit acceleration for the New York-listed company by year end.

Baidu break-up continues with video unit spin-off
Baidu break-up continues with video unit spin-off

The slow motion break-up of online search leader Baidu (Nasdaq: BIDU) marches on, with word that the company is spinning off its professional video service into a separate company. The move will see the service, Baidu Video, receive 1 billion yuan ($150 million) in new investment as it takes on 2 more partners.

This particular move comes just a week after Baidu detailed a major corporate reorganization that was also aimed at separating out its older and highly profitable search services from its newer businesses, most of those losing big money. (previous post) As a relatively neutral observer, I have to say this particular strategy looks smart as it will help investors see more clearly how Baidu’s different businesses are doing and invest in ones where they see the best potential.

The reality is that investors began calling loudly for such a break-up about a year ago, after Baidu founder Robin Li said he would continue to sacrifice company profits to build up his newer businesses like video and online-to-offline (O2O) services. Li initially reacted by threatening to privatize his company after Baidu’s stock fell sharply due to the investor discontent.

But more recently he’s taking this newer approach, which could ultimately remove many of the money-losing businesses from the New York-listed Baidu’s financial statements. Many of those units could end up as separate China-listed companies, such as Baidu’s Qiyi.com online video service and its Nuomi group buying unit. Now it appears that this other video unit could also be set for a separate listing.

According to the latest reports, the spin-off will see New Culture Media Group (Shenzhen: 300336) and venture capital firm SAIF each invest about 500 million yuan ($77 million) in Baidu Video. (English article; Chinese article) In exchange, each of the new partners would receive about 20 percent of Baidu Video, which would be valued at a relatively modest 2.5 billion yuan, or about $400 million.

Still in Control?

That implies that Baidu would remain the majority shareholder with about 60 percent of Baidu Video, though perhaps it would find additional partners. The unit operates a professionally generated content platform, and also video search and aggregation services. The unit is separate from Baidu’s better known Qiyi.com, which is a more traditional online video service similar to Youtube. Baidu announced in February it would sell Qiyi to an outside group led by Robin Li, which was part of the broader drive to separate its newer business from its search unit. (previous post)

Investors have been relatively positive on all the reorganizing, helping to fuel a nearly 40 percent jump in Baidu’s stock since a recent low in February. The ultimate aim in the strategy should see Baidu bring in new partners for all of these new businesses, while in some cases also maintaining a minority stake itself. That would allow Baidu to stop including those businesses in the results of the New York-listed company, which should lead to a return to its previous strong profit growth.

All that said, we’ll have to see how things progress in this break-up plan before we can say how successful Baidu will be. The Qiyi sale announced in February should provide a lift to Baidu’s second quarter results later this year, since Qiyi is one of the company’s biggest money-losers. Baidu’s profit may also get a lift in this year’s first quarter, following the sale last fall of a major portion of its controlling stake in the money-losing Qunar (Nasdaq: QUNR) to rival online travel agent Ctrip (Nasdaq: CTRP).

With those 2 units off its books, Baidu’s next major step will be to find partners that can allow it to make similar moves for Nuomi and its similarly loss-making online take-out dining service. Baidu appears to be on track to do both, meaning we could potentially see some return to strong profit growth as high as 50 percent by the end of the year.

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