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Tudou $1 Billion Merger Stokes Web Stock Rally: China Overnight

Tudou $1 Billion Merger Stokes Web Stock Rally
The Tudou Holdings Ltd. video website is displayed on computer screens in Beijing, China. Tudou’s ADRs surged 157 percent to $39.48, the highest level since its August initial public offering in New York. Photographer: Nelson Ching/Bloomberg

Tudou Holdings Ltd. soared to a record in New York, driving gains in Chinese U.S.-listed Internet shares, on plans by Youku Inc. to acquire the nation’s second-largest video sharing website in a $1 billion deal.

Tudou surged as much as 178 percent to a record-high $42.81 in U.S. trading, while Youku, owner of China’s biggest online video site, jumped the most in eight months. Online book retailer E-commerce China Dangdang Inc. climbed to a three-week high and social networking website Renren Inc. posted the biggest one-day advance in two weeks. The Bloomberg China-US 55 index of the most-traded Chinese stocks in the U.S. gained 0.3 percent to a one-week high of 104.52 in New York.

Beijing-based Youku plans to acquire smaller competitor Tudou in a $1 billion stock swap deal, the two companies said in a joint statement yesterday. The deal values Tudou at $39.89 per American depositary receipt, compared with its $15.39 closing price on March 9. As Internet users climb in China, the world’s fastest-growing major economy, online video providers have had to boost spending to lure viewers amid rising competition. Youku reported a fourth-quarter net loss yesterday.

“This merger was inevitable,” Tian X Hou, founder and senior analyst at T.H. Capital LLC, said by phone in New York yesterday. “If there’s no consolidation then the end of the story would be everybody goes bankrupt after our study on their business revenue models. No one can afford the long-lasting cash burn on content competition, bandwidth and traffic.”

Youku Net Loss

Holders of Tudou’s ADRs will receive 1.595 ADRs of Youku for each Tudou ADR they own, the two companies said. When the transaction is completed, Youku shareholders will own 71.5 percent of the new company, which will be named Youku Tudou Inc., according to the statement. The proposed deal requires the approval of shareholders and is expected to complete in the third quarter.

Tudou’s ADRs surged 157 percent to $39.48, the highest level since its August initial public offering in New York. Each ADR represents four common shares in the Shanghai-based company. Youku jumped 27 percent to $31.85, the biggest daily gain since June 28 and the highest price in seven months.

Youku incurred a net loss of 49.6 million yuan ($7.9 million) in the fourth quarter of 2011, widening by 32 percent from a year ago, according to a separate statement yesterday. Bandwidth costs rose to 109.7 million yuan, or 35 percent of sales, from 34 percent a year ago, the company said. Content costs were 20 percent of revenue in the quarter, up from 17 percent in the same period of 2010.

‘Much Stronger Player’

Youku expects to have synergies of between $50 million to $60 million a year after the deal with Tudou, Senior Vice President Michael Xu said during a conference call yesterday.

“Together they are a much stronger player in the industry against others,” T.H. Capital’s Hou said. “Strategically, the merger is good for both companies.”

Eric Wen, an analyst at Mirae Asset Securities Hong Kong Ltd. raised his 12-month price target for Youku to $35.50 from $31.50 yesterday. Wen recommends investors buy the shares.

“The merger will also likely play well with advertisers given the perceived strength in market leadership and sustainability of the combined company,” Andy Yeung, a New York-based analyst at Oppenheimer & Co., said in a research note yesterday.

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., dropped 0.5 percent to $38.83, falling for the first time in four days. The Standard & Poor’s 500 Index was little changed at 1,371.09.

Dangdang, Renren

ADRs of E-Commerce, China’s biggest Internet-based book seller known as Dangdang, gained 7.1 percent to a three-week high of $6.93. Beijing-based Renren climbed 3.9 percent to $5.61, the largest daily advance since Feb. 28.

The Shanghai Composite Index slipped 0.2 percent to 2,434.86 yesterday while the Hang Seng China Enterprises Index for Chinese companies traded in Hong Kong fell 0.3 percent to 11,225.91.

China Telecom Corp., the nation’s third-largest wireless network operator, slid 1.3 percent to a three-week low of $57.38 in New York. The company’s ADRs, each representing 100 common shares, traded 0.5 percent above its Hong Kong stock, narrowing from a 0.9 percent premium on March 9. The shares slipped 0.9 percent to HK$4.43 in Hong Kong yesterday, the equivalent of 57 U.S. cents.

Sina Corp. -- provider of the Twitter-like Weibo service in China, and which owns a 9.05 percent stake in Tudou -- fell 3.5 percent to $74.69.

Sina Slides

“Sina should have a capital gain from Tudou’s price premium in the deal, while it also means it will likely face stiffer competition on its online videos after Tudou’s acquisition by Youku,” Echo He, a senior analyst covering Chinese Internet stocks at Maxim Group LLC in New York, said yesterday by phone.

China’s customs bureau reported on March 10 a $31.5 billion trade deficit for February, the first in a year and four times the size of the previous largest shortfall. Exports rose 18.4 percent from a year earlier, while imports gained 39.6 percent, the agency said.

The People’s Bank of China weakened its daily fixing rate for the yuan by the most since August 2010 after the trade figures, as Governor Zhou Xiaochuan said the exchange rate is linked to the balance of payments.

The yuan declined 0.3 percent to 6.3265 per dollar in Shanghai yesterday, the biggest one-day loss since Jan. 20, according to the China Foreign Exchange Trade System.

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