Alibaba Prices China's YouTube Cheap: Brooke Sutherland

Youku Tudou should ask for more money.

Alibaba on Friday offered to buy the 81.7 percent of the website operator -- China’s version of YouTube -- that it doesn’t already own for about $3.5 billion minus net cash. The $26.60-per-ADR offer is a 45 percent premium to Youku’s average stock price in the 20 days prior.

That’s more than double the average premium paid for similar-sized buyouts of U.S.-traded Chinese companies in the past two years.

Average premiums paid for takeovers of U.S.-listed Chinese companies of more than $500 million

And Alibaba is bringing more than just cash to the table. Plugging Youku into Alibaba’s Internet ecosystem -- which includes 350 million active buyers on its China e-commerce sites -- will help Youku grow much faster than it could on its own.

Investors aren’t betting on a higher offer, with shares of Youku trading below the Alibaba proposal. Alibaba already owns an 18 percent stake in the company, and Youku Chairman Victor Koo is on board with the takeover.

Alibaba sure looks like it’s getting a bargain, though. Just four months ago, Youku Tudou was trading for more than $30 a share. The rout in Chinese equities and a disappointing sales outlook erased about $2 billion in Youku’s shareholder value between then and the time of Alibaba’s offer. The bid might put a backstop to any further declines, but analysts were already projecting the stock would rise to about $24 on its own over the next 12 months.

Alibaba doesn’t seem to be valuing Youku’s more than 500 million users very highly, either. As Sachin Shah of Albert Fried notes, the purchase price works out to about $10 per user.

Facebook paid about $42 per WhatsApp user in its $19 billion purchase of the messaging app in 2014. Google paid about $23 for each one of YouTube’s roughly 72 million users at the time of its $1.65 billion purchase of the video-viewing website in 2006, according to data compiled by Bloomberg.

It’s not like Alibaba doesn’t have the funds to cover a higher price. It had about $23 billion of cash and equivalents at the end of June. Alibaba also needs this deal. The online video market in China could balloon to more than $14 billion by 2018, up from $3.86 billion in 2014, according to estimates from consulting firm IResearch. That sounds like something for which a company like Alibaba, which wants to be a one-stop shop for China’s Internet needs, would be willing to pay a little extra.

It’s worth asking, anyway.

(This column does not necessarily reflect the opinion of Bloomberg LP and its owners.)

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