Iqiyi's privatization is blocked, American investors suggest trying possibilities other than privatization

A letter from Baidu's major shareholder Acacia Partners, an American hedge fund, prevented Robin Li from leading iQiyi on the "road back home." After experiencing the privatization of a large number of Chinese stocks at low prices and returning to the situation of being highly sought after in China's capital market, American investors seem to have suddenly realized that the former "little people" may also grow into giants. The US capital market may As a result, it will re-examine those Chinese stocks that they have not paid attention to.

Original title: Iqiyi's "returning home" encountered obstacles in the US capital market changed its face?

A letter from Baidu's major shareholder, American hedge fund Acacia Partners, prevented Li Yanhong from leading iQiyi on the "road back home." After experiencing the privatization of a large number of Chinese stocks at low prices and returning to the situation of being highly sought after in China's capital market, American investors seem to have suddenly realized that the former "little people" may also grow into giants. The US capital market may As a result, it will re-examine those Chinese stocks that they have not paid attention to.

Valuation is too low

"We believe that your valuation of iQiyi is too low." Baidu's major shareholder spoke bluntly in a letter to Baidu Chairman Robin Li. In this regard, the relevant person in charge of iQiyi told reporters that "no comment".

In February this year, Baidu issued an announcement stating that Baidu CEO Robin Li and iQiyi CEO Gong Yu on behalf of the consortium launched a takeover invitation to Baidu to acquire iQiyi at a valuation of US$2.8 billion.

Why is iQiyi's US$2.8 billion valuation too low? You can get a glimpse of the value of "friends".

Before the completion of the privatization of Youku Tudou, the market value of Storm Group was US$5.4 billion, and the valuation of Baidu Video after accepting investment was approximately RMB 3 billion...

"Iqiyi is now in the first echelon of online video. If According to a valuation of US$2.8 billion, the gap between it and Youku Tudou is very large. However, from the perspective of user size, revenue performance and business layout, there is no reason for Iqiyi to be only half the value of Youku Tudou. In terms of active user scale alone, iQiyi is 10 times that of Baidu Video. In this way, it is not just worth a valuation of US$2.8 billion." Analyst Ma Shicong analyzed to reporters.

An independent research firm valued iQiyi at US$5.8 billion in a report released on May 2. "That's one reason why they don't recognize $2.8 billion."

iQiyi is one of the few oligarchs of online video manufacturers and has considerable influence on the market.

According to data, iQiyi ranked among the top three in the annual average number of active users of video applications in 2015, with an increase of 184.4% that year. In addition, several major hit programs and online dramas produced by iQiyi have increased the number of paying users by 10 million in six months.

According to the letter, compared with the low valuation, what puzzled Baidu's major shareholders was that Baidu's investment in iQiyi surged before and after the acquisition offer was issued.

According to Baidu data, in the first four quarters as of the end of March this year, Baidu's content investment in iQiyi was 5.1%, 5.4%, and 5.9% respectively, but this data surged in the last quarter. 8.7%.

Acacia Partners even clearly pointed out in its letter that Baidu is not a cash-out tool to obtain personal financial benefits. "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."

Chicken ribs or chicken?

As we all know, although video websites are developing in full swing, they are still difficult to change the current situation of losses, as is iQiyi.

According to Baidu's 2015 annual report, although iQiyi's revenue in 2015 increased by 84.3%, reaching 5.295 billion yuan. However, due to high costs, the platform actually lost 2.38 billion yuan. For the upcoming second-quarter earnings report, Baidu expects a year-on-year growth of 21.3% to 24.2% in this quarter; if iQiyi's performance is excluded, this expectation represents a year-on-year growth of 28.1% to 31.1%.

iQiyi's continued losses have dragged down Baidu's overall performance, and the company has been criticized by American investors. But considering its development prospects, American investors seem to be hesitant about how to deal with this "drag".

In this letter, Acacia Partners put forward five suggestions for iQiyi's future development, including "following the 'Where to Go' approach, sell iQiyi through IPO, but retaining its controlling shareholder status" and "sell iQiyi's business to existing shareholders while retaining part of iQiyi's equity, so that it can continue to exert strategic synergies in multiple businesses in the future."

"Although U.S. shareholders want to divest a long-term loss-making part like iQiyi, it still needs to depend on the purchase price. In addition, U.S. shareholders will make predictions on the prospects of long-term loss-making businesses. If the loss-making businesses have great long-term development value, U.S. shareholders will tend not to divest, or they will need a higher purchase price before divesting." Cai Ling said.

Re-examination

According to incomplete statistics, in the past two years, the number of Chinese stocks that have delisted from the United States has exceeded 25, including Giant Network, Shanda Games, Perfect World, Home Inns, and Heyi Group. There are also many precedents for companies like iQiyi that have made low-cost privatization offers.

For example, Jumei Premium, which has been subject to controversy recently, had an issue price of US$22 per share when the company was listed on the New York Stock Exchange in May 2014, and its share price hit a peak of US$28.28 on the first day of listing. In February 2016, the price of the privatization offer received by Jumei Premium was US$7 per share.

The China market often shows high enthusiasm for investment in Internet stocks that have successfully returned.

In March 2015, within three months after Stormwind Technology (now renamed Stormwind Group) returned to China and landed on the GEM, it gained 39 daily limits, which increased more than 42 times compared with the issue price; Focus Media's market value before privatization was less than 2.7 billion US dollars, while the market value of the A shares soared 13 times.

But the U.S. capital market is very controversial. U.S. research firm Hang Ren Partners LLC recently stated in a report that Chinese-listed companies in the United States are taking advantage of regulatory loopholes in their jurisdictions to buy out shares from shareholders at low prices. The "returning home bonus" forced American investors to re-examine the Chinese stock market.

Possibilities other than privatization When

Li Yanhong and Gong Yu jointly issued a privatization offer, they eased the pressure on Baidu's financial report and were regarded by the outside world as an important reason for the privatization of iQiyi.

According to the reporter, at present, the video business is already the second largest money-burning business in Baidu after the O2O business. Baidu's operating profit for the first fiscal quarter of 2016 was RMB 2.211 billion, and iQiyi's operating profit margin that does not comply with U.S. GAAP will be lowered by 8.7%.

In the previous three quarters, iQiyi's dilution of Baidu's operating profit margin also reached 5.1%, 5.4% and 5.9% respectively.

But more importantly than alleviating the pressure on financial reports, the privatized iQiyi hopes to obtain more financing in China's capital market after dismantling the VIE structure.

Gong Yu's internal letter issued on February 13 also claimed that the reason why he joined forces with Robin Li was "in order to gain more support from the China market, to obtain stronger financing capabilities, and to obtain higher free development space in accordance with market needs."

He also said that after the privatization is realized, iQiyi will seek to return to China for listing at an appropriate time.

But Acacia Partners clearly does not agree with management's thinking. In its open letter, it laid out five possible plans for iQiyi's future: "First, Baidu can continue to retain iQiyi and strengthen relevant information disclosure to ensure that iQiyi's valuation is reasonable. Second, Baidu can directly provide financial support to iQiyi just like investing in Baidu Nuomi. Third, Baidu can follow Qunar's approach and divest iQiyi through an IPO, but retain its controlling shareholder status. Fourth, Baidu can divest iQiyi's business from existing shareholders while retaining part of iQiyi's equity, so that it can continue to exert strategic synergies in multiple businesses in the future. Fifth, Baidu can place new shares to ensure that all shareholders (not just a few special shareholders) enjoy fairly the benefits of holding iQiyi."

"Any of the above practices we suggest can reflect the true value of iQiyi, while at the same time improving its financing flexibility, ensuring that it continues to remain within Baidu's ecosystem, and bringing the best potential returns to Baidu shareholders. All of these options seem more favorable from the perspective of Baidu shareholders and the company and your personal reputation." Acacia Partners said in an open letter.

Editor: yvette