Chinese Video Site Tudou Selling U.S. IPO at 62% Discount to Rival Youku
Tudou Holdings Ltd., China’s second- biggest video website, is attempting a U.S. initial public offering at a 62 percent discount to larger rival Youku.com Inc. (YOKU) after equities plunged this month, sapping demand for new stock.
The Shanghai-based company is seeking to raise as much as $180 million offering 6 million American depositary receipts for $28 to $30 each, according to a regulatory filing. That values the company at about 16 times sales in the 12 months through March 31. Youku.com, which went public in the U.S. last year, trades at a multiple of 41.
Tudou’s site offers user-generated videos much like Google Inc.’s YouTube as well as licensed and proprietary content. The company needs cash to invest in copyrighted movies and TV series to gain visitors amid a crowded online-video market, according to Shanghai-based RedTech Advisors LLC. Even at the steep discount to Youku, Tudou’s price range is high, according to David Menlow, president of Ipofinancial.com.
“It’s a little rich relative to what they have at this point in terms of losses accumulating in the manner that they are,” he said. The discount to Youku “could be the only reason why people are interested in it.”
Tudou, which is losing market share even as it spends more money, is attempting to complete its sale after 13 U.S. IPOs were withdrawn or postponed from Aug. 7 to Aug. 12, the most in a week since 2000, according to data compiled by Bloomberg. More than $2 trillion was erased from U.S. equity values in the past three weeks amid Europe’s debt crisis, signs the U.S. economy is slowing, and a downgrade of the government’s credit rating.
While U.S. stocks rose yesterday, erasing last week’s drop, Tudou may be better off selling itself, Menlow said.
“If the stock is going to go down after the IPO, the company would be better off to sell it at a lower price and sell all of the shares,” he said. Last week, following a report that Baidu Inc. had approached Tudou about a takeover, people with knowledge of the situation said Tudou planned to press forward with the share offering.
The company is tapping the public market for cash to finance technology upgrades, bandwidth expansion and rights to videos as it vies with Youku.com for visitors in the world’s biggest online market. China had 485 million Internet users at the end of June, according to data from the government-sponsored China Internet Network Information Center. There were about 215 million U.S. Internet users in the U.S. as of July, according to Reston, Virginia-based researcher ComScore Inc.
Tudou’s expenses to license videos for the site ballooned to 68.2 million yuan in 2010, more than 11 times what it spent in 2008, its filing shows. The cost of content and leasing Internet bandwidth to deliver videos to users will continue to increase, and the company may not achieve profitability, according to the prospectus.
“It’s a land grab to go out and get eyeballs,” Scott Billeadeau, who helps oversee about $17 billion at Fifth Third Asset Management in Minneapolis, said of Tudou’s spending. “It’s tough to assess, as the land grab is going on, whether you’re paying the right price or you’re overpaying.”
At the same time, Tudou is losing market share. It accounted for 14 percent of online-video advertising revenue at the end of the second quarter, compared with 17 percent at the end of 2010, while Youku gained two percentage points to 23 percent and Sohu.com Inc.’s video site jumped to 13 percent from 7.9 percent, according to data from researcher Analysys International.
Another 28 percent of the market is split among five competitors including Baidu’s Qiyi.com; a site operated by Xunlei Ltd., which is part-owned by Google Inc.; and Nasdaq- listed Ku6 Media Co., the data show.
“Tudou has to price at a pretty significant discount to get investors interested” in a space that has too many competitors, said Michael Clendenin, managing director at RedTech Advisors.
The companies get most of their income from advertising revenue, which for Chinese video sites almost doubled to 1 billion yuan ($157 million) in the second quarter, according to Beijing-based Analysys. Tudou had 90 million registered users at the end of June, according to its filing, compared with 35.6 million at the end of 2008.
Investors in Tudou include Singapore’s state investment company Temasek Holdings Pte, which will trim its stake to 17 percent after the offering from 21 percent, according to the IPO prospectus, and Crescent Point, which plans to trim its stake to about 13 percent from 16 percent.
The company has accumulated losses of $179 million since the website launched in 2005, according to its filing, while annual revenue has jumped more than 43-fold since 2007. Net revenue, which excludes sales tax, was about $53 million in the 12 months through March, according to the regulatory filing.
Youku, which has posted combined net losses of more than $100 million since 2007, raised $233 million pricing its Dec. 7 IPO above the marketed range, and the shares surged 161 percent in their New York Stock Exchange debut.
Each of Tudou’s ADRs will represent four Class B ordinary shares and will trade on the Nasdaq Stock Market under the symbol TUDO. Credit Suisse Group AG (CSGN) and Deutsche Bank AG (DBK) are leading the offering.
To contact the reporter on this story: Lee Spears in New York at firstname.lastname@example.org.