MEDIA: Youku, iQiyi Marriage Rumors Excite
Bottom line: A merger between Youku Tudou and iQiyi looks like a strong possibility because it would greatly benefit both companies, creating a clear market leader to rival LeTV and traditional broadcasters.
Rumors that former online video leader Youku Tudou (NYSE: YOKU) is in talks to merge with rival iQiyi have reignited interest in the former’s beleaguered stock, as investors get excited about another landmark deal in the space. Youku Tudou’s shares soared 17 percent in the latest trading session, and have now nearly doubled since the beginning of April.
The sourcing is quite vague on the reported talks for a merger with iQiyi, which is owned by online search leader Baidu (Nasdaq: BIDU). But I would give the reports a strong chance of being true, as this kind of a move seems consistent with past behavior of Youku Tudou’s CEO Victor Koo, who is highly practical and thus would seriously consider selling his company if such a move made financial sense.
The latest reports don’t say much beyond the rumors of merger talks, and don’t even cite any specific person inside either company. (Chinese article) The reports do note that Youku Tudou would de-list if the 2 companies reach a deal, and that they would then try to re-list in China. That appears to be a growing trend among smaller Chinese Internet companies whose shares have languished over the last few years in New York, even as bigger names like Alibaba (NYSE: BABA) and Baidu have flourished.
Youku Tudou was once an investor darling itself, billing itself as China’s equivalent of YouTube. Its stock once traded at more than $60 not long after its IPO in late 2010 on big hopes for its prospects, especially after Koo engineered a merger between his own Youku with leading rival Tudou in 2011 to form a clear leader in the space.
But since then the stock has languished as Koo failed to find a formula to make his company profitable. It reached an all-time low of about $13 in March as investors lost interest in the company. That contrasted sharply with rival LeTV (Shenzhen: 300104), whose China-listed shares have surged since late last year to give it a market value far higher than Youku Tudou’s. Of course it’s worth noting that LeTV is a highly profitable company, which is obviously far more attractive to investors.
A Youku Tudou merger with iQiyi would certainly be a strong pairing, bringing together 2 of the industry’s top 5 companies to create a name that would probably re-take the online video crown from LeTV. If such a deal were to happen, I could see a scenario where Baidu would become the largest single stakeholder in the combined company with perhaps a 30-40 percent stake. The company would then re-list in China, where it would almost certainly gain far bigger interest from investors than it now does in New York.
One potential stumbling block to such a merger could be e-commerce leader Alibaba, which paired with Yunfeng Capital to purchase 18.5 percent of Youku Tudou last year for $1.22 billion. (previous post) Alibaba doesn’t have any other major online video assets, and might be reluctant to sell its Youku Tudou stake as it tries to boost its own entertainment business. At the same time, I can’t imagine Alibaba and Baidu both remaining as major stakeholders in the same online video company.
All that said, I really do think there’s a strong chance that this deal is happening, mostly because Baidu and Youku Tudou both want it to happen. As a private company iQiyi doesn’t disclose any financials, but I strongly suspect it’s also losing money. Thus a combination with Youku Tudou could create a company that may finally have the scale to earn some profits. If and when that happens, look for an exciting new company to emerge that has the clout not only to challenge LeTV, but could also provide some major competition for China’s older traditional TV broadcasters.
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