NetDragon Buy-Back: New Baidu Talks Coming?
A new announcement by online gaming and mobile app store operator NetDragon (HKEx: 777) is raising the possibility of further talks with leading search firm Baidu (Nasdaq: BIDU), just a week after the pair agreed to a major asset sale. This new announcement is headlined with a recent share buyback by NetDragon, whose stock plummeted 20 percent last week after it announced it would sell its controlling 57 percent stake in app store 91Wireless to Baidu for $1.1 billion. (previous post) But a closer reading of the announcement seems to contain some other implications, including closer tie-ups with Baidu and even a potential renegotiation of the 99Wireless deal.
Let’s start with a look at the headline news in the announcement, which has NetDragon saying it spent about $1.8 million to buy back nearly 800,000 of its shares for HK$17.79 each on July 22. (company announcement) The buy-back was most likely a move to support the company’s stock price, which tanked from previous levels of around HK$19.50 to as low as HK$16.82 after the 91Wireless deal was announced. Since then, NetDragon’s shares have bounced back somewhat and closed on Tuesday at HK$18.56.
The huge plunge after the announcement indicated that shareholders believed NetDragon wasn’t getting a fair price for the 91Wireless stake, which leads to my first observation about hidden implications in this newer announcement. When they announced their original deal last week, both sides said they had only signed a memorandum of understanding and set an August 14 deadline to complete the actual sale.
But now that investors have voiced their disapproval, I suspect NetDragon could be rethinking its original sale price. That guess is based on the wording in this latest announcement, that says ” If the proposed transaction materializes, it will enhance the NetDragon’s earnings and broaden the Company’s capital base.” Use of the word “if” seems to lack the kind of confidence one would expect to see from NetDragon at this point if it really wanted to complete the deal.
Of course I may be reading too much into a single word. But based on the initial shareholder reaction and the wording in this latest announcement, I wouldn’t be surprised if the companies fail to reach an agreement by the August 14 deadline, and NetDragon tries to negotiate a higher price.
The new announcement also speaks of future tie-ups with Baidu, which leads me to my second speculation, namely that perhaps Baidu could ultimately purchase a strategic stake in NetDragon or even buy the company completely. NetDragon says simply in the announcement that it will “explore further cooperation opportunities with Baidu on other business areas.” NetDragon’s other main business is in mobile games, and Baidu has made it clear on many occasions that diversification beyond its core search business and the mobile Internet are 2 of its primary future objectives. Thus a marriage of the 2 companies would seem to be a good fit.
In terms of size, NetDragon certainly wouldn’t be too difficult for Baidu to digest. The company has a market value of HK$9.5 billion, or about $1.2 billion. That’s just $100 million more than the sale price of the 91Wireless stake, an amount that cash-rich Baidu could easily afford. Baidu has also made it clear it wants to make more big acquisitions, following its purchase of the online video sharing business of PPS earlier this year for $370 million, and its raising of $1 billion through a bond offering late last year.
I know I’m doing a lot of guessing by reading so much implication into a few vague phrasings in this latest announcement from NetDragon. But against the backdrop of other circumstances, I would say the odds are around 50-50 that NetDragon will try to negotiate a higher price for 91Wireless, and I would put the odds of an outright acquisition of NetDragon by Baidu at around 25 percent.
Bottom line: NetDragon may be set to seek a higher price from Baidu for its 91Wireless stake, based on undertones in its latest announcement.
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