INTERNET: Tencent Charges Up for Supercell, Pumps Up Mobike

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Bottom line: A new $3.5 billion bank loan to help pay for  game developer Supercell and an investment in shared bike service Mobike extend Tencent’s savvy strategy of targeted backing for companies that can quickly contribute to its core businesses.

Tencent nears mega loan for Supercell buy

Leading Internet company Tencent (HKEx: 700) is in a couple of major investment headlines as the new week begins, one in the virtual realm and the other grounded on the streets of major cities like Beijing and Shanghai. The larger of the items comes with word that Tencent is on the cusp of securing a $3.5 billion loan to help pay for its pending purchase of a controlling stake in Finnish game maker Supercell. The other item has the company leading a recent funding round for Mobike, operator of a shared bicycle service that is helping to revive China’s biking tradition.

While the 2 investments are hugely different in size, both have the common thread in representing Tencent’s relatively selective investment strategy that focuses on a small number of areas, mostly related to entertainment and socializing. That contrasts sharply with Internet rivals Alibaba (NYSE: BABA), which never saw an acquisition target it didn’t like, and Baidu (Nasdaq: BIDU), which also has a fairly diverse investment appetite.

I’m not always in complete agreement with Tencent’s investments, but I do like its targeting of larger targets like Supercell, which can utilize Tencent’s huge cash reserves and provide immediate contributions to its core gaming business. According to the latest headlines, Tencent is using a $3.5 billion loan provided by a large syndicate of 23 banks to help to finance the purchase first announced in June. (English article; Chinese article)

Some of the biggest contributors to the loan are from Tencent’s home China market, including a $1 billion commitment from Bank of China (HKEx: 3988; Shanghai: 601398) and $700 million from Shanghai-based SPD Bank (Shanghai: 600000), and $400 million from China Merchants Bank (HKEx: 3968; Shanghai: 600036). From the domestic banks’ perspective, the loan probably looks like a safe bet due to Tencent’s strong reputation, and also will help them to diversify beyond the risky property loans that have become a recent favorite among Chinese lenders.

The purchase will put Tencent in control of one of the world’s largest game makers, and complements its early purchase of a small stake in global leader Activision Blizzard (Nasdsaq: ATVI), which is about 3 times Supercell’s size. Such tie-ups  should give Tencent preferred access to some of the world’s most popular online games, providing a steady pipeline for its biggest single income source.

Bike Investment

Next there’s the bicycle investment, which comes in the form of a new  fund-raising round for Mobike, operator of a service that lets users ride bikes anywhere they are available and then simply park them on the street or sidewalk when they’re finished. The service is much more flexible than traditional rivals, because Mobike’s bikes are far more numerous and don’t require placement in special racks that are often inconvenient.

The latest reports are quite vague, quoting Mobike’s CEO simply saying that Tencent led a third funding round for his company. (Chinese article) Wang Xiaofeng was speaking up after his company’s chief rival, Ofo, announced earlier last week that it had just raised $130 million in new funding. (previous post) Wang’s failure to provide a specific number suggests Mobike’s new investment was less than Ofo’s, though I do expect it was probably still in the neighborhood of $100 million.

That means Tencent’s investment was probably quite small, perhaps around $50 million. This particular investment looks similar to Tencent’s early backing of taxi-hailing app Didi, which went on merge with several rivals and is now worth about $35 billion. Didi and Mobike both use smartphone-based apps at the core of their services. Tencent has already incorporated Didi into its popular WeChat and QQ services in a broader effort to monetize those platforms, and is probably hoping to do the same with Mobike.

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