INTERNET: Baidu Raises Funds, Reorganizes as Spin-Offs Loom

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Bottom line: Baidu’s new reorganization is further evidence that the company plans to spin off its newer, money-losing units into separate companies, which could list on China’s OTC-style New Third Board later this year.

Baidu reorganizes

Online search leader Baidu (Nasdaq: BIDU) is in a couple of big headlines as it reportedly prepares to spin off some of its non-core businesses, led by word of a major reorganization that could help facilitate such spin-offs. A separate headline says that Baidu is also in talks for a $1 billion syndicated loan, in a move that is mostly market driven but also aims at getting fresh money to continue funding many of its loss-making newer businesses.

Baidu came under fire last year for its sluggish profit growth, as founder Robin Li insisted he would continue to invest heavily in his company’s loss-making businesses like its Nuomi group buying site and Qunar (Nasdaq: QUNR) online travel agency. Investors punished Baidu’s stock as a result, leading to reports earlier this year that Baidu was planning to spin off many of those businesses into separately listed companies.

The latest news of a major corporate overhaul seem to reinforce those earlier reports, since the reorganization would create some new units that could easily be spun off partly or entirely into separate companies. The overhaul was detailed in an internal e-mail from Li that has been conveniently leaked to media, indicating Baidu wants investors to know about the big reshuffling.

The overhaul began in February, when Baidu divided its businesses into 4 units: one for its core search business; one for its mobile services; one for its new businesses; and one for financial services. (Chinese article) In an adjustment to that initial move, Baidu has now decided to combine the search and mobile units into a single division. Such a move is certainly logical, since there’s big overlap between those two areas.

Baidu’s shares jumped 3.5 percent in the latest trading session as word of the overhaul trickled out, and are up 40 percent from a trough in February when China’s stock markets were in free-fall. But the shares are still down from their levels last summer when the company first reported disappointing profit growth and indicated it would continue pumping big money into its newer businesses. (previous post)

The second headline is relatively straightforward, and has Baidu in talks for a 5-year syndicated lending facility worth $1 billion led by Citigroup, Deutsche Bank and HSBC. (English article) The loan consists of a $500 million term loan and a $500 million revolving credit line, and would be used by Baidu for general corporate purposes. It comes after reports last month that e-commerce giant Alibaba (NYSE: BABA) was also in talks for a similar loan worth up to $4 billion.

Favorable Market Conditions

In both instances, Alibaba and now Baidu are taking out these loans because market conditions are favorable for such borrowing. Chinese Internet companies are quite hot right now, raising billions of dollars in funding from investors who see big potential in the market. Profitable, cash-rich leaders in the space like Baidu and Alibaba are attractive to borrowers in such an environment, which is why banks are willing to lend them so much at favorable rates.

In both cases, Alibaba and Baidu could also have specific goals for the new funds. I previously speculated that Alibaba might be looking to buy out a big chunk of its shares currently owned by Yahoo (Nasdaq: YHOO). (previous post) It’s possible Baidu also has its eye on some big M&A, though in this case I suspect it will use the money to help fund its loss-making businesses like Nuomi, Qunar and its take-out dining service.

Baidu has already spun off its Qiyi.com online video service, and could soon make a similar spin-off for Nuomi. (previous post) It was reportedly previously eyeing an IPO for Qiyi.com, and possibly Nuomi on a new strategic industries board that was being planned for Shanghai. But that board has been put on indefinite hold due to volatility in China’s stock markets. That means Baidu might have to look to China’s over-the-counter (OTC) board in Beijing, often called the New Third Board, if it wants to make listings for some of its money-losing companies this year.

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