Baidu Gets Offer From Executives for Majority Stake in Qiyi

  • Search provider's shares climb 8.2%, the most since October
  • Bid could lead to eventual IPO of Qiyi in China, analyst says

Baidu Inc., the Chinese Internet search company, said it received an offer from two executives to buy all of its majority holding in Qiyi.com Inc.

Robin Yanhong Li, Baidu chairman and chief executive officer, and Yu Gong, CEO of Qiyi, offered to buy the 80.5 percent stake in the video-streaming website, which has an enterprise value of $2.8 billion, according to a statement from Baidu Friday.

By spinning Qiyi out from Baidu, Li and Gong essentially will take the video service private, which will then allow them to seek an initial public offering in China, Henry Guo, an analyst at Summit Research Partners, said. That’s because the operations would receive a high valuation from Chinese investors that they wouldn’t get in the U.S., he said.

“If you IPO in China, because of the brand awareness, you may get a really high premium,” he said. “In China, people don’t care whether or not you’re profitable yet.”

Li said last March that he would sell Baidu shares to the Chinese market if permitted by regulators.

Shares Rise

Baidu rose 8.2 percent to $152.73, its biggest gain since Oct. 30. The shares are down 19 percent this year.

Qiyi is one of the top three online video operators in China, and its valuation on the public market should be boosted by the recent Alibaba Group Holding Ltd. acquisition of Youku Tudou Inc., Guo said. Alibaba in November agreed to buy Youku in a deal that has been said to be valued at $4.8 billion.

Qiyi joins a slew of Chinese companies listed on U.S. stock exchanges that have received buyout offers over the past year. While Chinese stocks haven’t fared well in recent months, adding to the risk of an IPO, Qiyi should still attract abundant interest, Guo said. Investors want to see online video services on the public market and have the ability to buy their shares, he said.

In the second quarter of 2015, Baidu for the first time revealed how much impact Qiyi has on the company -- in short: it’s a drag. Spinning out the operations would paint Baidu’s financials in a better light, which would improve the search giant’s performance on the U.S. stock market, Guo said. The video service contributed to a 5.1 percentage point adjusted operating margin reduction. Qiyi also reported a loss, for the third quarter, cutting Baidu’s adjusted operating margins by 5.4 percentage points.

“These two rationales are very strong,” Guo said. “I think it’s a good way to do it.”

In 2012, Beijing-based Baidu bought Providence Equity Partners’ holdings in the subscription video service, which gave the Chinese search giant a “substantial majority stake.” Qiyi has been building out its video content akin to Netflix Inc., working on both unique produced shows as well as distribution agreements with U.S. providers such as Paramount Pictures.

The buyers expect Qiyi to remain a strategic partner of Baidu after the transaction and Baidu has formed a special committee to evaluate the transaction, Baidu said.

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