ENTERTAINMENT: SMG’s Newest Target in Baidu’s iQiyi?

Bottom line: Rumors that Shanghai Media Group is in talks for a strategic stake of Baidu’s iQiyi could quite possibly be true, with an investment of about $3 billion likely in exchange for half of the company. 

iQiyi talking tie-up with SMG?

The New Year is starting with a salient rumor from the online video space, with reports that the new media investment arm of Shanghai Media Group (SMG) may be eyeing a major stake purchase of Baidu’s (Nasdaq: BIDU) iQiyi. The reports aren’t being widely circulated in the Chinese media yet, which suggests they may not be accurate. The head of SMG’s China Media Capital (CMC), which would reportedly make the investment, has also previously said he’s not interested in online video assets right now.

But such a tie-up would be quite consistent with Baidu’s recent strategy of selling major stakes in its non-core businesses to strategic partners. From SMG’s perspective, such a deal would also make sense, as it plays catch-up with both private companies and also state-owned rival Hunan Broadcasting in the fast-evolving online video space.

The latest rumors that have everyone buzzing come from a website named Digewang, which was reposted in a WeChat public account. (Chinese article) The post simply quotes an unnamed knowledgeable source saying that a fund controlled by CMC is in talks to make an investment worth tens of billions of yuan in iQiyi. An investment of about 20 billion yuan would equate to around $3 billion, which would probably equal about half of iQiyi’s market value, based on reports I’ve read over the past year.

A report on this latest talk notes that numerous similar rumors have cropped up in the last year. Among those were one that iQiyi was in talks to merge with rival Youku Tudou (NYSE: YOKU), even though iQiyi’s chief quickly denied such reports. More merger talk emerged in November, though the reports at that time didn’t include the name of a buyer or strategic partner.

All that said, such a stake sale would look quite similar to what Baidu has done recently in a number of other cases involving assets outside its core search business. The company sold a major stake in its Qunar (Nasdaq: QUNR) online travel site to industry leader Ctrip (Nasdaq: CTRP) in October. It was reportedly in talks just last week to sell a similarly major stake in its fast-growing take-out dining business to a strategic investor for $300-$500 million. (previous post)

Baidu Under Pressure

Baidu has come under growing pressure from investors who are unhappy about its huge spending on these non-core businesses, which have undercut its overall profit growth. Accordingly, these stake sales are designed to infuse the companies with their own new cash to fund their growth, and also to provide strong strategic partners who can help them accelerate their march to profitability.

An iQiyi stake sale would also make sense for CMC, which has become one of China’s most aggressive investors among traditional state-run media. CMC is almost certainly eyeing its equally aggressive state-run rival Hunan Broadcasting, which has been pumping big money into its young Mango TV digital video unit. Mango was in the headlines a month ago when media reported it was in the process of raising about $1 billion. (previous post)

CMC’s charismatic chief Li Ruigang has formed a growing number of big strategic tie-ups with a wide range of partners over the last few years, and is generally seen as one of the best-connected partners for foreign media wanting to invest in China. Many of those partnerships have involved content creation, including a major film production tie-up with Warner Bros (NYSE: TWX) announced in September. (previous post) But the real piece that’s still missing from SMG’s growing media empire is a strong national content delivery channel, which is what iQiyi could provide.

At the end of the day, the sketchy sourcing on the rumors makes me slightly skeptical that talks on a CMC investment in iQiyi are really happening. But the same thing was true back in November when sketchily source reports emerged on a purchase of Hong Kong’s South China Morning Post by e-commerce leader Alibaba (NYSE: BABA), and those reports later turned out to be true. Accordingly, I would say there’s a greater than 50 percent chance that this new deal is really happening, and perhaps we could see a formal tie-up announced before the Lunar New Year.

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