Exclusive: Alibaba and Tencent Suspend Negotiations to Buy iQIYI Stake Over Price and Regulatory Concerns – Sources

HONG KONG / BEIJING (Reuters) – Alibaba Group Holding Ltd and Tencent Holdings Ltd have each had separate talks with Baidu Inc to acquire a controlling stake in video streaming service iQIYI Inc, people with knowledge of the matter told Reuters.

But talks have stalled with little hope of resuming anytime soon as they balk at a valuation of around $ 20 billion demanded by Baidu and the two companies, which have their own video streaming services, face scrutiny by Chinese antitrust regulators, two people said.

Another Chinese tech giant, TikTok owner ByteDance, has also been examining internally the possibility of acquiring a controlling stake in iQIYI, three sources said.

Considered the Chinese equivalent of Netflix Inc, Nasdaq-listed iQIYI has a market capitalization of $ 16.4 billion, which values ​​Baidu’s 56.2% stake at around $ 9.2 billion.

Tencent, whose interest in iQIYI was first reported by Reuters in June, estimates the company is worth about half of what Baidu wants, two people said.

Baidu, iQIYI and Tencent declined to comment on the deal negotiations. ByteDance declined to comment on the extent of its interest in iQIYI. Alibaba did not respond to a request for comment.

Despite being the No. 2 in the Chinese video streaming market, money-burning iQIYI has yet to break even in its 10-year history. Its latest quarterly results showed declines in revenue and subscribers, punishing its stocks which have lost nearly a fifth of their value in the past two weeks.

It is also under investigation by the U.S. Securities and Exchange Commission after a report released in April by short seller Wolfpack Research accused iQIYI of inflating the numbers. iQIYI, which is cooperating with the probe, said an internal review found no evidence for Wolfpack’s claims.

The video streaming service, whose cash and cash equivalents nearly halved in the nine months leading up to the end of September, to 3.16 billion yuan ($ 481 million), plans to raise at least 1 billion dollars. dollars in the coming months, said a person with direct knowledge of the matter.

This can take the form of a stock offering or a convertible bond or both, the person said, adding, however, that the recent decline in the company’s shares has clouded its funding outlook.

iQIYI did not immediately respond to a request for comment on its funding plans. Baidu said in a statement that iQIYI, as an independent publicly listed entity, has smooth funding channels in the financial markets and its support for iQIYI has not changed.

REGULATORY WINDS

Investing in iQIYI now may be politically difficult for Alibaba and Tencent after Beijing this month unveiled draft guidelines to prevent monopoly behavior by internet companies. The scope of the project ranges from big data to payment services.

This follows the shocking decision by regulators to curb the $ 37 billion IPO of Alibaba’s subsidiary, Ant Group, just days before its debut in a staggering reprimand for the founder of Ant and Alibaba , Jack Ma.

“After regulators released new fintech and anti-trust rules that will affect Alibaba’s business, Alibaba management is currently reluctant to make big deals,” one person said.

The purchase of iQIYI would give ByteDance, which derives most of its profits from the short video app Douyin, the Chinese version of TikTok, the opportunity to enter the main market of TV shows and movies of longer duration.

It has a separate Xigua video platform, which mainly offers 1-30 minute videos, an area where it planned to increase its investment.

But Baidu, who owns over 90% of iQIYI’s shareholder voting rights, is unlikely to view ByteDance as a buyer given a multi-year feud between the two companies in China’s digital advertising market. , two sources said.

The search engine giant’s interest in selling its stake in iQIYI stems from a shift in focus towards the development of artificial intelligence and autonomous driving – areas that require a significant initial investment.

Tencent Video was ranked the number one player in the Chinese video streaming market with a penetration rate of 45% at the end of 2019, followed by iQIYI with 43% and Alibaba’s Youku with 27%, according to research firm BlueCatData.