China’s Alibaba & Tencent halt talks to buy iQIYI stake: issue prices, increased regulations

Alibaba Group Holding Ltd and Tencent Holdings Ltd are separately conducting talks with Baidu Inc to secure a controlling stake in video streaming service iQIYI Inc, people with knowledge of the matter told Reuters. But the discussions have screeched to a halt with little hope of recommencing soon as they stare at a valuation of around $20 billion demanded by Baidu and as both companies, which have their own video streaming services, face heightened scrutiny by China’s antitrust regulators. Another Chinese tech giant, TikTok owner ByteDance has also internally considered at the possibility of acquiring a controlling stake in iQIYI, three sources said.

Considered China’s equivalent to Netflix Inc, Nasdaq-listed iQIYI has a market capitalisation of $16.4 billion, which pegs Baidu’s 56.2% stake at about $9.2 billion. While it is the No 2 player in China’s video streaming market, with fast emptying coffers iQIYI has yet to break even in its 10-year history. Its latest quarterly earnings showed declines in revenue and subscribers, directly reciprocated by its shares which have lost nearly a fifth of their value in the last two weeks.


The video streaming service, whose cash and cash equivalents almost dropped to half in the nine months to end-September to 3.16 billion yuan ($481 million) plans to raise at least $1 billion in the coming months, said one person with direct knowledge of the matter. It is also being investigated by the US Securities and Exchange Commission, post a report in April made public by short-seller Wolfpack Research accused iQIYI of inflating numbers.

Investing in iQIYI now may be more complicated for Alibaba and Tencent after Beijing this month unveiled draft guidelines chiefly targeted at preventing monopolistic behaviour by internet companies. The draft’s scope ranges from big data to payment services. Purchasing iQIYI would provide ByteDance with the opportunity to step in the main market for longer length TV shows and movies.

But Baidu, which owns more than 90% of iQIYI’s shareholder voting rights, is not likely to consider ByteDance as a buyer, considering a years-long feud between the two companies in China’s digital ad market, said two sources. The search engine giant’s interest in selling its stake in iQIYI is in lieu with a shift in focus to developing artificial intelligence and autonomous driving – areas which require a heavy upfront investment.