Sources: Alibaba and Tencent put talks to buy iQIYI stake on hold

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Alibaba Group Holding Ltd and Tencent Holdings Ltd have every held separate talks with Baidu Inc to obtain a controlling stake in movie streaming service iQIYI Inc, people with knowledge of the matter told journalists at our partner news agency Reuters.

However, the talks have stalled with very little hope of recommencing soon because they shout in a valuation of about $20 billion required by Baidu and as both companies, that have their own video streaming services, face heightened scrutiny by China's antitrust regulators, two people said.

Another Chinese technology giant, TikTok owner ByteDance has also internally looked at the potential for acquiring a controlling stake in iQIYI, three sources have said.

Considered China's equal to Netflix Inc, Nasdaq-listed iQIYI includes a market capitalisation of $16.4 billion, which worth Baidu's 56.2% stake at about $9.2 billion.

Tencent, whose interest in iQIYI was first reported by Reuters in June, believes the business is worth about half what Baidu wants, said among the people.

U.S.-listed stocks of iQIYI were down 4.2% at $21.41 in premarket trading on Friday.

Alibaba didn't respond to a request for comment.

While it's the No. 2 player in China's video streaming market, cash-burning iQIYI has yet to break even in its 10-year history. Its most recent quarterly earnings showed drops in revenue and readers, punishing its stocks that have lost almost a fifth of the value in the last two weeks.

It's also being researched by the US Securities and Exchange Commission following an report in April issued by short-seller Wolfpack Research detained iQIYI of inflating numbers.

IQIYI, that is cooperating with the probe, has said an internal review has found no proof of Wolfpack's claims.

The video streaming service, whose cash and cash equivalents almost halved from the nine weeks to end-September to 3.16 billion yuan (approximately $481 million) intends to raise at least $1 billion in the coming months, said one person with direct knowledge of the problem.

That will take the kind of a share a convertible bond or both, the person said, adding, however, that the company's recent share slide has clouded its funding prospects.

IQIYI didn't immediately respond to a request for comment on its own fundraising strategies. Baidu said in a declaration that iQIYI, as a separate publicly listed entity, has smooth funding channels in capital markets and its own support of iQIYI hasn't changed.

REGULATORY HEADWINDS

Investing in iQIYI now could be politically difficult for Alibaba and Tencent following Beijing this month introduced draft recommendations aimed at preventing monopolistic behaviour by internet businesses. The draft's scope ranges from big data to payment services.

This came on the heels of this shock move by regulators to slam the brakes on Alibaba affiliate Ant Group's $37 billion IPO only days before its introduction in a stunning rebuke for Ant and Alibaba founder Jack Ma.

"After regulators published new fintech and anti-trust rules which will hit Alibaba's business, Alibaba's management is currently reluctant to proceed with big deals," one person said.

Purchasing iQIYI would give ByteDance, which makes most of its gains from short video app Douyin, the Chinese version of TikTok, the chance to go into the main market for longer duration TV shows and films.

It will have a separate video platform Xigua, which largely provides movies of 1-30 minutes, an area it has been planning to step up investment in.

But Baidu, which retains over 90 percent of iQIYI's shareholder voting rights, isn't very likely to consider ByteDance as a buyer given 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 position in iQIYI comes on the back of a shift in focus to creating artificial intelligence and autonomous driving - regions which require heavy upfront investment.

Tencent Video was ranked the top participant in China's video streaming marketplace using a penetration rate of 45% at the end of 2019, followed closely by iQIYI with 43% and Alibaba's Youku with 27 percent, according to research company BlueCatData.

The team at Platform Executive hope you have enjoyed this news article. Initial reporting via our official content partners at Thomson Reuters. Reporting by Julie Zhu in Hong Kong, Yingzhi Yang, Zhang Yan and Yilei Sun in Beijing. Editing by Edwina Gibbs.

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