Youku to Buy China Online-Video Rival Tudou in $1 Billion Deal

Deal will strengthen the company's ability to add online-video users, may signal consolidation trend.

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Youku Inc., owner of China's most-popular online video site, plans to acquire smaller competitor Tudou Holdings Ltd. in a $1 billion stock deal that will help lower costs for licensing and transmitting content.

Based on Youku's March 9 closing price, the deal values Tudou at $39.89 a share, or 159% more than last week's closing price.

The deal will strengthen the new company's ability to compete with Baidu Inc. and Tencent Holdings Ltd. in adding online-video users in a nation where Google Inc.'s YouTube is restricted. Youku, owner of China's most-popular online video website, and Tudou together accounted for more than a third of the country's web-video advertising revenue last quarter, according to research company Analysys International.

"There are huge purchasing economies for content through this merger," said Eric Wen, head of internet research at Mirae Asset Securities in Hong Kong. "They need to have scale, bargaining power with upstream TV producers, and to deter entry by Tencent and Baidu."

Youku's ADRs rose 1.1% in New York trading on March 9, to $25.01, valuing the Beijing-based company at $2.85 billion. Tudou rose 12.5%, to $15.39, valuing the Shanghai-based company at $436.4 million.

The two sites became locked in a legal battle late last year, with each company accusing the other of intellectual-property infringement. Tudou claimed that Youku had pirated episodes of a popular program, "Kangxi is Coming," and was especially irked that Youku was using the show to "support pre- and post-roll advertisements." Youku accused Tudou of stealing its shows, with titles such as "The Emperor's Harem" and "Hip-Hop Office Quartet." What effect the pending acquisition will have on the lawsuits isn't clear.

The transaction, which requires the approval of Youku and Tudou shareholders, is expected to close in the third quarter, the companies said. When the transaction is completed, Youku shareholders will own 71.5% of the new company, which will be named Youku Tudou Inc., the companies said.

"We expect to see significant synergies across a number of areas including leveraging licensed content over a larger user base and realizing efficiencies in bandwidth management and other common expenses," Youku Chief Executive Officer Victor Koo said in the statement.

Goldman Sachs Group Inc., Allen & Co. and China Renaissance Holdings Ltd. are advising Youku in the transaction. Morgan Stanley and Credit Suisse Group AG are advisers for Tudou.

Youku accounted for about 22 % of China's online-video advertising revenue in the fourth-quarter, according to Analysys. Second-ranked Tudou's market share was about 14%, vs. 13% for Sohu.com Inc. and 6.9% for Baidu's iQiyi unit.

"This is step one in industry consolidation," said Jin Yoon, a senior analyst with Nomura Securities Hong Kong. "There could be more coming."

A separate statement today said that Youku's fourth-quarter loss had widened to 49.6 million yuan ($7.8 million). The company had been expected to post a loss of 43.8 million yuan, according to the average of five analysts' estimates compiled by Bloomberg.

Revenue more than doubled, to 309.3 million yuan.

-- Bloomberg

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