Move over FaceBook IPO as the stock news story of the moment is China's largest Internet stock-swap deal on record. The two firms – Youku and Tudou – represent the business of streaming free Web videos to Chinese content consumers. The combined company, called Youku Tudou, will continue to trade as an American depository receipt on the New York Stock Exchange under the ticker "YOKU." Youku and Tudou shareholders will hold roughly 71.5 percent and 28.5 percent of the combined entity, respectively, according to a press release.
It’s interesting to note that similar to many Internet-based companies, turning a profit had largely remained elusive to the two Chinese companies. Youku had reported a wider fourth-quarter net loss recently of RMB49.61 million or $7.9 million versus RMB37.72 million loss in the previous year. The company has lost roughly $200 million in the last three years, while its competitor Tudou saw its losses double to $350 million in 2010. Tudou also had a rocky IPO last year. Today, the company’s shares rose nearly 150 percent to $38.34 in early trading, while Youku shares swung from losses to a nearly 13 percent gain putting shares at nearly $29. Shares of both companies are up over 40 percent this year to date prior to today's merger announcement.
The two merged online video competitors will create the largest Chinese Web video presence with control of about a third of the overall market, in a move that may cut at a glut of competitive local players. These include Google-analog Baidu (BIDU), Sohu.com (News - Alert) (SOHU) and Tencent and each of these companies may present a glut of competition that depresses margins in the future. According to Piper Jaffray analyst Gene Munster in a Monday note to clients, he rated Youku shares "neutral." He also designated a price target of $27 a share based on a valuation of 10 times the company's expected 2012 revenue and cash flow.
Munster wrote, "Overall, we view the Youku/Tudou acquisition as a net positive for the company as we believe it eliminates a significant competitor in content acquisition and will make Youku far and away the largest online video company in China." In addition, Youku CEO Victor Koo said that, “The transaction will produce an industry leader and also lead to improvement in the industry structure and the underlying economics of the online video sector in China.”
One caveat to the rosy picture is the fact that that prior to the announcement, a surge in Tudou shares had analysts questioning whether investors had advanced word of the merger, according to The New York Times. This could mean further scrutinizing of the deal by regulatory commissioners in the future. Goldman Sachs and Allen & Co. advised Youku on the merger, while Morgan Stanley and Credit Suisse advised Tudou.
Edited by Carrie Schmelkin