Bottom line: Baidu’s reported plan to spin off many of its non-core units for separate listings in China looks like a smart move to attract Chinese buyers for its newer businesses while retaining US investors for its lucrative core search business.
Leading search engine Baidu (Nasdaq: BIDU) is reportedly eyeing plans to spin off many of its smaller units for IPOs in China, marking a novel alternative for the growing number of Chinese tech firms torn between listing at home and in the US. The US was the traditional choice for listings by Chinese venture-backed tech firms for most of the last 2 decades, since domestic listings were difficult or impossible during that time due to a heavy bias towards big state-owned companies.
But more recently China has rolled out a new group of boards aimed at attracting high-growth venture-backed companies. The earliest of those, the ChiNext board launched in 2009, has proven quite successful, nurturing such high-flyers as online video site LeTV (Shenzhen: 300104) and film production company Huayi Bros (Shenzhen: 300027). A more recently launched over-the-counter (OTC) board has also proven quite popular, and Shanghai plans to launch its own emerging industries board later this year.
The emergence of so many new listing options has prompted a growing number of US-listed Chinese companies to privatize and return home, aiming to get better valuations from domestic investors who are more familiar with their names. But overseas listings also have their attractions, since such markets are typically better regulated, offer access to a wider range of investors and are also less prone to the wild swings seen on China’s boards.
For smaller companies, domestic listings do seem like the smart choice, since many of these are unlikely to attract much interest from international investors. But for big names like Baidu, a hybrid approach that includes listings both at home and abroad might become a more desirable option. Such a strategy would see such larger companies list their core operations in more mature overseas markets, while separately listing their smaller non-core units in China.
That appears to be the approach Baidu is now contemplating, with media reports saying the company is planning a number of domestic IPOs later this year for its growing stable of businesses outside its core search services. Units being considered for separate listings include its online music business, its Nuomi group buying site, and its popular iQiyi online video site, the reports say. (English article; Chinese article)
Consistent with Earlier Signals
Baidu hasn’t commented on the reports, but they’re certainly consistent with earlier signals that the company was planning an IPO for iQiyi and a sale of its online music unit. The latest reports say other units being groomed for spin-offs and separate listings include Baidu’s take-out dining delivery service, its literature unit, and its healthcare and film units.
Some of those would be listed on the new OTC board, formally known as the National Equities Exchange and Quotations board and sometimes called the “third board”. Other larger units might go to the ChiNext, or the new emerging industries board expected to launch in Shanghai later this year.
The approach looks relatively smart, giving Chinese investors a chance to buy into Baidu’s emerging businesses, while allowing foreigners to continue buying into its highly lucrative search business. Many of Baidu’s smaller units like iQiyi and Nuomi are losing money but are also well known to Chinese, which should help to attract local investors who more often trade based on momentum rather than company fundamentals.
This particular approach is also being tried out by online real estate services leader SouFun (NYSE: SFUN), which is in the process of buying a China-listed shell company, Wanli New Energy (Shanghai: 600847), that will become a separate listing vehicle for some of its non-core assets. (previous post)
This kind of a dual-listing approach looks smart for sector leaders like Baidu and SouFun, allowing them to tap global markets for their core businesses and local Chinese investors for their smaller emerging units. Accordingly, we can probably expect to see more such spin-offs and listings in the year ahead, perhaps including an eventual spin-off by Tencent (HKEx: 700) for its highly popular QQ and WeChat social networking services.
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