INTERNET: Baidu Fails at Soccer, Video Spin-Off

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Bottom line: Baidu could get a new higher offer for iQiyi later this year after a former deal collapsed due to undervaluation, while a new Chinese group led by deal maker Sonny Wu is likely to buy a majority stake of AC Milan later this year.

Baidu’s iQiyi sale collapses

Online search leader Baidu (Nasdaq: BIDU) is in a couple of major headlines, each marking a setback in the company’s aspirations to diversify into entertainment. In the larger item, Baidu’s previously announced sale of its iQiyi online video unit has collapsed, after a minority investor complained the sale price was too low. The second headline has Baidu chief Robin Li’s name suddenly disappearing as leader of a group trying to buy European soccer club AC Milan, with reports that another major Chinese deal maker has emerged as head of the group.

Both failures represent disappointments for Baidu, though neither a huge setback. The iQiyi deal was announced back in April, and was part of Baidu’s plan to spin off the loss-making unit that was undermining the company’s overall profitability. Meantime, the AC Milan deal would have been a personal investment for Li, rather than one by his company, and was part of a bigger spree of global sports purchases by big Chinese companies and their wealthy founders.

We’ll begin with the deal for iQiyi, one of China’s leading online video companies that is rapidly encroaching on the turf of the nation’s traditional TV stations. But despite its huge growth prospects, iQiyi and rivals like Alibaba’s (NYSE: BABA) Youku Tudou are all losing massive money as they spend heavily on video content and search for big revenue sources beyond traditional advertising.

In response to shareholder pressure to sell off some of its loss-making units, Baidu earlier announced the plan to spin off iQiyi to a group led by Robin Li in a deal that valued the company at $2.8 billion. But one of Baidu’s big shareholders, the hedge fund Acacia, last week issued an open letter complaining the valuation was far too low and iQiyi should be worth closer to $5.8 billion. (previous post)

Now Baidu has just announced the group that originally offered to purchase iQiyi has withdrawn its non-binding bid. (company announcement; Chinese article) The letter simply said the 2 sides failed to reach an agreement, though the timing of the announcement seems to indicate that Acacia’s complaint about valuation was probably a factor in the decision.

This kind of insider dealing is quite common in Chinese companies, which sell assets back and forth between their major shareholders at prices that are often far cheaper than their real values. I commend Baidu for scrapping this earlier deal, even if it made the decision under pressure from outside shareholders. I also expect we could see a new revised offer come by year-end for iQiyi, perhaps valuing the company at around $4.5 billion.

Li Bows From Soccer Bid

Next there’s the AC Milan deal, which has been rumored for the last few months with Robin Li’s name frequently cited as head of the buyer group. Baidu and Li remained mum throughout most of the speculation, which seemed to indicate he was really involved. But last week he broke his silence and started saying he had no idea about the soccer club, indicating that perhaps something had changed in the talks.

Now the latest reports are saying a major Chinese deal maker named Wu Shenjun, who goes by the English name Sonny Wu, has taken over as leader of a group trying to buy a majority stake in the club. (English article; Chinese article) AC Milan’s owner, Finvest, has been engaged in talks with a wide range of potential buyers for the last 2 years, presumably including Baidu’s Li at one point.

Thus it’s hard to say if this latest twist will result in a final deal, or if Wu will become just the latest failed bidder. Wu is the head of GSR Capital, a private equity firm, and has a reputation as one of China’s top deal makers. So perhaps that means he’ll be more skilled than his predecessors at getting this particular deal completed, meaning the long anticipated sale of AC Milan to a Chinese buyer could finally get done later  this year.

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