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Group Led by Baidu CEO Abandons Bid to Buy Out Video Unit
Investors had criticized 2.3 billion dollars iQiyi sale price as low
By ALYSSA ABKOWITZ in Beijing and RICK CAREW in Hong Kong
July 25, 2016 9:00 a.m. ET
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A consortium led by the chief executive of Chinese search giant Baidu Inc. dropped its 2.3 billion dollars bid to buy out the company’s video-streaming operation after investors criticized it as a sweetheart deal for Baidu’s chief to profit at the expense of public shareholders.
Baidu said Monday that a consortium including its CEO, Robin Li, and the CEO of video site iQiyi.com, Yu Gong, withdrew their February offer to acquire iQiyi because they couldn’t reach an agreement on the deal structure and purchase price.
The aborted bid comes after New York hedge fund Acacia Partners, which says it owns more than 400 million dollars in Baidu shares, wrote an open letter to Mr. Li last week criticizing the low sale price of the video unit. Acacia argued that the consortium’s offer valued Baidu’s video platform at 2.8 billion dollars compared with a 4.8 billion dollars valuation for rival Youku Tudou, which Alibaba Group Holding Ltd. bought in 2015.
Acacia said the short-term upside to Baidu’s earnings from the sale was minimal compared with the potential long-term value for Baidu shareholders if they continued to own the video unit.
A person familiar with the deal said neither the investor’s letter nor the corporate-governance issue led to the withdrawal. The person said Mr. Li’s ownership would have been only around 20%, with the other investors taking most of iQiyi’s shares, and that Mr. Li wouldn’t have had voting control.
The person added that the regulatory environment, along with foreign-currency volatility, made the deal increasingly complicated for the buying party.
Baidu has poured money from its lucrative search business into cash-burning operations, including online video. The company has had a near monopoly on China’s internet-search traffic since Google Inc. pulled out of China in 2010 because of censorship concerns. While investors have pushed Baidu’s management to improve profitability in its video and on-demand business, many investors considered the buyout bid a lowball offer.
iQiyi, which is China’s top online video site by subscribers, has as of June more than 20 million subscribers paying for content and is valued at 5.8 billion dollars by Shanghai market-research firm 86Research. The firm values rival Tencent Holdings Ltd.’s video business at 7.4 billion dollars and Youku at 4.7 billion dollars. China’s online video advertising market is estimated to reach 53 billion yuan (7.93 billion dollars) by 2018, up from 16 billion yuan in 2014, according to 86Research.
Some analysts and investors had questioned the iQiyi deal shortly after it was announced. In a February research note, analysts at Arete Research Asia Ltd. said the 2.3 billion dollars price barely covered the expenses Baidu sunk into the video unit and speculated that Mr. Li and his buying consortium might try to publicly list the company in China to get a higher valuation. When the deal was originally announced, Baidu’s shares, listed in New York, rose 7%, with investors seeing the sale as a way to clear the video unit’s losses from Baidu’s balance sheet.
“Baidu’s investments in Qiyi will be monetized by its CEO and management, and not the shareholders that funded them,” Arete analysts said.
The person familiar with the withdrawal said the buying group had considered listing on the Chinese stock market, as it would have given the video site more access to capital.
The withdrawal comes ahead of Baidu’s second-quarter earnings, due this week. Baidu has cut its revenue forecast for the quarter to 2.8 billion dollars from 3.1 billion dollars expected previously. Analysts surveyed by Thomson One estimate on average revenue of 2.7 billion dollars because of a decline in medical advertising after a government investigation into the search company’s search and advertising practices.
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