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Tencent Stake-Purchase Report Fuels Youku Most in Month

March 27 (Bloomberg) -- Youku Tudou Inc. rallied the most in a week in New York after NetEase Inc. reported that Tencent Holdings Ltd., Asia’s largest Internet company, bought a 20 percent stake in the Chinese video website.

American depositary receipts of Youku gained 3.3 percent to $28.67 after NetEase said on its website that Tencent will pay at least $300 million in cash to purchase shares of the Beijing-based company, citing three unidentified people familiar with the discussions. Youku said in a statement to the New York Stock Exchange that it doesn’t comment on rumors. Jerry Huang, a spokesman for Tencent, didn’t immediately return a call seeking comment after regular business hours.

Tencent and Youku have reached an investment intent and the announcement will be made at the end of the month, according to the NetEase report yesterday. Youku Chief Executive Officer Victor Koo told Bloomberg News on March 14 that the company is receptive to partnerships. The Bloomberg Index of the most-traded Chinese stocks in the U.S. dropped 0.6 percent to 97.19, snapping a three-day rally.

“Youku has a business know-how in the online entertainment area, but it doesn’t have the traffic that Tencent has,” Tian X. Hou, the founder of T.H. Capital LLC, said by phone from New York yesterday. “Big user traffic is very important.”

Trading volume with Youku’s shares was almost triple the average of the past 90 days, according to data compiled by Bloomberg.

Merger Talks

While Youku hasn’t had any merger talks, the industry is at a stage where partnerships are being considered, CEO Koo said.

“As a public company we certainly can say that we’re open to discussing strategic options,” Koo said in an interview in Beverly Hills, California earlier this month. “You’re not going to see another company acquiring us.”

Chinese Internet companies are grappling with how to attract and keep users who increasingly go online for movies, music, television shows and books. The country’s market for online video will probably be worth 17.8 billion yuan ($2.86 billion) this year, then double to 36.6 billion yuan in 2017, according to a report by Internet consultant IResearch. More than 500 million people in China access the Internet from mobile devices.

Tencent agreed to pay about $500 million for a 28 percent stake in South Korea’s CJ Games to bolster its lineup of online and mobile entertainment, the companies said in statements yesterday. The owner of the WeChat instant messaging application is making acquisitions to bolster content and location services amid increased competition.

Trina Solar

Hollysys Automation Technologies Ltd., which makes automation systems, gained 3.1 percent to $19.94. Trina Solar Ltd., China’s second-largest photovoltaic panel maker, slumped 8.5 percent to $13.10.

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., added 0.2 percent to $34.85. The Shanghai Composite Index dropped 0.2 percent to 2,063.67 yesterday. The Hang Seng China Enterprises Index of mainland stocks traded in Hong Kong advanced 1.6 percent to a one-month high of 9,849.63.

To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Tal Barak Harif at tbarak@bloomberg.net Rita Nazareth, Marie-France Han

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