Li Yanhong and Gong Yu withdraw iQiyi's privatization offer. The low valuation is the direct trigger

On the evening of July 25, Baidu Chairman and CEO Robin Li and iQiyi CEO Gong Yu sent a letter to Baidu's board of directors on behalf of the buyer consortium, announcing the withdrawal of the iQiyi privatization offer made in February this year.

Original title: Shareholders are unwilling, Li Yanhong and Gong Yu withdraw iQiyi's privatization offer.

On the evening of July 25, Baidu Chairman and CEO Li Yanhong and IQiyi CEO Gong Yu sent a letter to Baidu's board of directors on behalf of the buyer consortium, announcing the withdrawal of iQiyi's privatization offer made in February this year. The letter stated that after several rounds of communication and negotiations with a special committee composed of three independent directors, the buyer's consortium decided to withdraw the offer and terminate the acquisition of Baidu's plan to hold all 80.5% of iQiyi shares due to failure to reach an agreement on the transaction structure and purchase price.

The privatization of iQiyi dates back to February this year. Baidu announced that its board of directors had received non-binding proposals from Baidu CEO Robin Li and iQiyi CEO Gong Yu to acquire 80.5% of all issued shares held by iQiyi based on its valuation of US$2.8 billion. Baidu said that based on the non-binding proposal, the two parties will sign a business cooperation agreement after completing the transaction to strengthen strategic cooperation.

But just this month, Baidu's major shareholder, American hedge fund Acacia Partners, recently stated in an open letter to Baidu Chairman and CEO Robin Li that the US$2.8 billion valuation of iQiyi's privatization was too low, which was contrary to Baidu and its long-term interests of shareholders required Robin Li to cancel the acquisition of iQiyi. This was also the direct trigger for Baidu to withdraw its offer to privatize iQiyi.

The origin of iQiyi and Baidu iQiyi

, formerly known as Qiyi, was officially launched on April 22, 2010.

Data shows that in August and December 2011, Baidu spent US$45 million to subscribe for Series B preferred shares of Qiyi, and on November 3, 2012, it acquired the shares held by Providence, the former second largest shareholder of iQiyi, becoming its single largest shareholder.

In 2013, Baidu spent US$370 million to acquire PPS to merge PPS and iQiyi. Since then, it has made frequent moves in many fields such as homemade dramas, product construction, and solo broadcasts.

On November 19, 2014, Baidu introduced Xiaomi investment to iQiyi with an open mind, and at the same time invested an additional US$300 million in iQiyi to strengthen the video ecosystem layout.

In the privatization in February this year, Li Yanhong and Gong Yu's relatively low-cost privatization was to leave profit margins for iQiyi to introduce more strategic investors, enhance iQiyi's cash flow and blood-making capabilities, and accelerate its domestic The pace of listing.

Shareholders are unwilling to accept the undervaluation of 2.8 billion

yuan. Although iQiyi has always played a "dragging back" role in Baidu's earnings reports, video websites "burning money" has become the default status quo in the industry. Coupled with the recent growth of iQiyi's payment business has been obvious, shareholders are inevitably unwilling to be reconciled with the 2.8 billion yuan privatization valuation.

If iQiyi returns to China, it will definitely obtain a valuation higher than US$2.8 billion given the domestic capital market generally high valuations for entertainment, film and television companies.

Acacia Partners pointed out that independent research firm 86Research valued iQiyi at US$5.8 billion in a report released on May 2, which is more than twice the price of US$2.8 billion by Yanhong Li. Late last year, Alibaba acquired peer company Youku Tudou for $4.8 billion.

Acacia Partners pointed out in the letter that iQiyi is China's leading video website, and Baidu's proposal to sell it not only violates the interests of the company's long-term shareholders, but may also cause permanent damage to the company's reputation. "We believe that your proposal to acquire iQiyi is in direct conflict with safeguarding the long-term interests of Baidu and its shareholders. We are concerned that making decisions involving conflicts of interest will damage your reputation and Baidu. Baidu should be an important company with a good reputation, not a cash-out tool for personal financial benefits,"Acacia said.

Obviously, shareholders feel that it would be too cheap to privatize iQiyi just like this.

iQiyi's losses in 2013, 2014 and 2015 were 743 million yuan, 1.11 billion yuan and 2.38 billion yuan respectively.

But although the increasing costs of iQiyi have directly led to a decline in Baidu's net profit margin, the growth of iQiyi's revenue has also allowed shareholders to see the potential for its valuation growth.

According to Baidu's financial report, iQiyi's revenue in 2015 was 5.295 billion yuan, an increase of 84.3% from 2.873 billion yuan in 2014, while iQiyi's revenue in 2014 also increased by 113.6% from 1.345 billion yuan in 2013. This momentum gives shareholders hope.

At the same time, in the middle of last year, iQiyi announced that it would reach 5 million paid members. In just half a year, this number reached 10 million. In June this year, iQiyi announced that it had reached 20 million effective paying users! Yang Xianghua, senior vice president of iQiyi, also emphasized that this number does not include users who have suspended paying, but refers to users who continue to pay in real time. In fact, this number is still growing rapidly. Even if the number of real-time paying users remains unchanged at 20 million, under a rough estimate, based on an annual paying user of 180 yuan per person per year, the net income brought by 20 million users a year is 3.6 billion yuan! This figure has exceeded iQiyi's total losses last year. In addition, iQiyi is also developing derivatives e-commerce, child-focused video apps, live video and other businesses. As the video website with the largest number of paying users in China, it seems to have embarked on a unique path to profitability and is getting closer and closer to profitability.

According to people close to the transaction, in the design of the transaction structure, if the transaction is completed, Li Yanhong's final shareholding in iQiyi will be equivalent to his current shareholding in Baidu. Therefore, Li Yanhong himself has a dual role of reciprocity between buyers and sellers and did not directly participate in the negotiation of this transaction. The main negotiation work is undertaken by a buyer's consortium composed of more than ten potential investors. In addition, the termination of the acquisition has nothing to do with the previous open letter issued by a foreign investor opposing the privatization of iQiyi. The investor did not understand these details of the transaction.

Baidu also said that iQiyi has always been regarded by Baidu as a high-quality business in the field of online video and plays an important role in Baidu's mobile transformation and strategy of connecting people and services.

Indeed, as a rising star, iQiyi has ranked among the top three in the online video industry and has long occupied the first place.

Since 2016, iQiyi has maintained its leading position in the industry in all PC and mobile terminals, and its advantages have continued to expand: On December 2, 2015, China Online Audiovisual Program Service Association released the "2015 China Online Audiovisual Development Research Report" pointed out that in 2015, iQiyi "broke the hegemony of Heyi Group in China's commercial online video industry in the past ten years." In October 2015, iQiyi's market share was 56.4%, Heyi Group's market share was 47%, and Tencent Video's market share was 38.9%. On May 22, 2016, online application rating service provider App Annie released its April Global Application Index report, which pointed out that since July 2015, iQiyi has entered the top ten App Annie global revenue list many times, becoming the application with the highest revenue from non-game subscriptions in China in 2015. The "2015 China Online Audiovisual Development Research Report" shows that iQiyi's paying users have far exceeded the combined number of second and third places in the industry, and has always maintained its first position in market share.

According to the latest iResearch data, in May 2016, iQiyi APP had 299 million monthly users and 2.84 billion hours of usage. It is second only to WeChat and Mobile QQ in the Internet market in China. It is the third largest mobile phone application on the Internet in China and occupies a leading edge in the video industry.

In May 2016, the complete IP ecosystem was presented for the first time at the iQiyi World Congress. Announced innovative achievements, industry standards and development strategies in the fields of IP development such as pure online variety shows, online dramas, online movies, animation, movie roaming interactions, and media integration, and released a VR technology strategy representing the future form of entertainment display, and announced for the first time a new brand. iQiyi Literature, to open up the entire IP industry chain.

iQiyi has always maintained its first position in the market share in terms of video membership, and has created a large-scale drama member scheduling model and built China's largest online large-scale movie distribution platform. With its strong revenue performance, iQiyi has topped the list of App Annie 2015. Top of the revenue list of popular non-game applications in the Chinese market. As of June 1, 2016, its number of effective VIP members has exceeded 20 million, constantly creating the largest paid video membership in China.

At the same time,"Iqiyi Animation House" was officially included in its VIP member service system last month. Iqiyi member content and service coverage have been expanded to users of all ages. Iqiyi continues to lead the development of the industry in the video payment market.

In 2016, iQiyi officially deployed the VR field in depth and received support from more than 300 partners in the industry to create the largest Chinese VR true ecosystem. At present, iQiyi has launched a VR product suite, covering more than 90% of the VR hardware on the market. In terms of content, iQiyi announced that it will implement VR content on 10 popular film and television IPs this year, and has opened 100 top IPs to invite VR game developers to cooperate in development. At present, popular drama variety shows such as iQiyi's self-made "Old Nine Gates" and "1.3 billion decibels" have simultaneously launched VR content, and have received positive feedback from many users. It is reported that the previously popular national comic book "Spirit Domain" has also confirmed the development of VR games.

In the first half of 2016, iQiyi performed well in copyright and homemade content. The solo drama "Descendants of the Sun", the fourth season of the solo variety show "Running Brothers", the online drama "The Best of Us","Remains of Sin", the second season of the online variety show "I'm Going to School", and the online movie "My Goddess" have all become phenomenal IP content, setting a historic playback record and becoming a benchmark in various fields. In the first half of 2016, iQiyi launched nearly 46 online drama content and more than 30 variety content, building China's largest online movie distribution platform.

iQiyi continues to enrich the connotation of "movie-game interaction" through multiple interactive modes between drama and games, animation and games, variety shows and games. iQiyi has successfully released a number of "movie game interactive" hit games including "Hua Qian Gu","Spirit Realm","I'm Going to School", etc., among which the "Hua Qian Gu" game has reached 850 million yuan in half a year. From the second half of 2015 to May this year, the total volume of iQiyi's joint release of movie game interactive products exceeded 1.5 billion yuan, becoming the number one brand of "movie game interactive" in China.

The domestic capital market is cold or another reason

If shareholders 'opposition is a pull to withdraw the privatization of iQiyi, then the recent cold domestic capital market can be a push to withdraw privatization.

In the first half of last year, the A-share market experienced a round of continuous rise. Many mid-stock companies represented by Qihoo 360 said that they would delist from the U.S. market through privatization and return to the domestic market. But in fact, last year, 38 U.S. listed stocks announced privatization transactions. However, less than ten companies have actually completed privatization.

There are many ways for Chinese stocks to return to the domestic market. Through IPO, backdoor listing, mergers and acquisitions by listed companies, and spin-offs, the sectors connected to the capital market can be the main board, the GEM, or the New Third Board. It was previously rumored that iQiyi was targeting the strategic emerging board, but due to the grounding of the strategic emerging board, iQiyi's options have become limited. Many Chinese-listed companies, including iQiyi, have difficulty meeting the conditions for continuous profits and are difficult to achieve through IPO.

In May this year, the China Securities Regulatory Commission made a rare statement on "suspending the return of China Stock Exchange", saying that it was highly concerned about the obvious price differences in domestic and overseas markets and shell resource speculation.

IPO, mergers and acquisitions, two possible ways to return to the A-share market, have become extremely difficult.

Yien.com compiled and released it based on Tencent Technology and Entertainment Financial Reports.

Editor: Nancy