INTERNET: Coolpad Bidding War Brews Between Qihoo, LeTV

Bottom line: Qihoo could drop its privatization plan and launch a buyout offer for Coolpad, in a bid to protect its joint venture with Coolpad and stop a rival offer for the company from LeTV.

Bidding war shaping up for Coolpad?

A new media report is detailing an intriguing behind-the-scenes clash taking place between security software specialist Qihoo 360 (NYSE: QIHU) and online video company LeTV (Shenzhen: 300104), with big stakes involved for both sides. If the report is true, Qihoo is quickly finding itself in a difficult position that could end with collapses for its recent privatization bid or its joint venture partnership formed late last year with smartphone maker Coolpad (HKEx: 2369).

The clash is pitting 2 of China’s highest-profile Internet executives against each other, with Qihoo’s outspoken CEO Zhou Hongyi coming under a surprise attack from younger rival LeTV CEO Jia Yueting. In this case it appears Zhou may soon have to choose between going forward with his plans to privatize Qihoo, or abandon that plan and instead mount a counter-offensive to prevent LeTV from making a bid to take control of Coolpad.

LeTV

The story is quite complex, so it’s best to go in chronological order to understand what’s happening. Things began last December, when Qihoo entered the smartphone business by forming a joint venture with Coolpad, an experienced manufacturer and well-known brand that needed cash due to stiff  competition in the Chinese market. (previous post)

Six months later Coolpad’s controlling shareholder was looking to raise more cash by selling part of its stake, and many believed Qihoo would be the buyer. But then LeTV emerged as the surprise buyer, reportedly purchasing 18 percent of Coolpad for HK$2.73 billion ($350 million) in June as part of its own bid to enter the smartphone space. (previous post)

Right around the same time as LeTV’s surprise Coolpad investment, Qihoo unveiled its own surprise by announcing plans to take the company private. That announcement was part of a broader wave of similar privatization plans by US-listed Chinese companies whose shares had become undervalued on Wall Street. Qihoo’s plan was the most expensive of those buyout offers, since the company has a market value of nearly $8 billion.

In a Difficult Spot

Now the latest media reports are saying that Qihoo’s Zhou is suddenly finding himself in a difficult situation due to the latest developments at Coolpad. According to the reports, LeTV is quietly negotiating behind the scenes to boost its stake in Coolpad further still, making it the company’s largest stakeholder. (Chinese article)

A separate headline seems to support the fact that LeTV wants to boost its stake, saying that the company has just hired a former Bank of America Merrill Lynch senior executive to head its global fund-raising business. (Chinese article) LeTV’s Jia confirmed his hiring of Winston Cheng on his microblog, hinting he has big fund-raising plans ahead for such major purchases as a buyout offer for Coolpad.

Obviously a LeTV takeover of Coolpad would be detrimental to Qihoo, which has already plowed more than $400 million into its own joint venture with Coolpad. One potential alternative might see Qihoo make its own counter-bid for Coolpad. But Qihoo’s Zhou reportedly might have difficulty funding such a bid, since he’s using most of his financial resources now to raise money for his privatization plan, the reports say.

If all of this is true, then Zhou may soon have to make a tough decision about where his priorities lie: with privatizing his company, or with making a counter-bid for Coolpad. Qihoo’s current stock price is around $62, which is below the $66 level where it was trading before it announced the privatization plan at $77 per share. Thus abandoning the plan probably wouldn’t have a big impact on Qihoo’s stock, but would force the company to remain listed in New York for the foreseeable future.

But if Qihoo was considering such a move, it should stop first to think about what Coolpad wants. At this stage it really does seem like Coolpad prefers LeTV as its partner, and thus Coolpad might rebuff a counter-offer from Qihoo. But the independent-minded Zhou was never a person to care about what his friends or enemies thought. Accordingly, it’s quite possible we could see him decide to drop his attempt to privatize Qihoo, and a bidding war could erupt for Coolpad.

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