Bottom line: Sohu could privatize and sell itself after its Changyou buyout, while LeEco’s mass layoffs could presage a shuttering of all its newer operations as it reverts to its original online video business.
Two relatively large pullbacks are in the headlines as we reach the midpoint of the week, led by the latest privatization bid for online game specialist Changyou (Nasdaq: CYOU) by parent Sohu (Nasdaq: SOHU). That news is coupled with the unrelated by equally large retrenchment by struggling online video company LeEco (Shenzhen: 300104), which is making mass layoffs in its bid for survival.
Each of these stories is interesting because the future existence of a major company is at stake. In the first case, the Changyou privatization could signal a future privatization and sale of the company’s parent, Sohu, one of China’s oldest Internet players. The LeEco story represents the latest twist in the downward spiral for this company, which appears to be rapidly slimming down or closing most of its operations outside its original core online video service.
Let’s begin with Changyou, which has been struggling for years due to stiff competition in China’s fragmented online gaming space. That space has seen Tencent (HKEx: 700) and NetEase (Nasdaq: NTES) emerge as the two clear sector leaders over the last 5 years, with just about everyone else reporting rapidly shrinking revenue. That was certainly the case for Changyou, whose revenue fell 8 percent in its latest reporting quarter.
In a nod to the company’s fading prospects, Sohu has done what I’ve been predicting for a while now and announced it is launching a bid to take the gaming unit private. (company announcement) Sohu is offering $42.10 per Changyou American Depositary Share (ADS) in the buyout, representing a slight premium to the last closing price before the announcement, but about 35 percent higher than its previous levels before that.
Even at its current levels, the company has an anemic price-to-earnings (PE) ratio of about 11 and a relatively modest market value of $2 billion. This particular deal on the surface looks like many of the buyouts we saw in a wave 2 years ago, spearheaded by US-listed Chinese companies that believed their shares were undervalued.
But in this case things are slightly different, since Changyou’s listed parent, Sohu, is actually launching the bid, making it look more like a larger corporate retrenchment. The unit is lowly valued for a reason, namely because it’s been shrinking for quite some time, and this looks like Sohu’s bid to find a permanent long-term solution for the company. That solution could be the privatization of Sohu itself, which I’ve also been predicting for a while, followed by the sale of its various pieces, including Changyou, a major web portal, and video and search businesses.
From Sohu and Changyou, we’ll move to the equally struggling LeEco, which is rolling out massive layoffs in its latest bid to save the company. (English article) Those layoffs include more than half the staff at its smartphone unit, which probably presages a closure of the unit completely, and a massive slashing of its US workforce that would leave it with just 50 workers there, down from a previous 300. The cuts follow similar slashing at the company’s sports unit, Le Sports.
The emerging story appears to be that LeEco is rapidly slashing all of its newer businesses, which are the source of its current woes, and attempting to return to its core online video service that was the source of its original success. An important part of that story was a power struggle that emerged over the weekend, which saw major stakeholder Sunac wrest partial control of the company’s listed unit from founder Jia Yueting. (English article)
That’s important because the listed unit contains LeEco’s successful online video business, and the weekend power shift shows that Sunac wants prevent Jia from plundering that business to try and save its other struggling units. Those other units, including sports, smartphones and smart cars, are all bleeding cash and are the source of the company’s current woes.
The latest layoffs, combined with the weekend power struggle, seem to be finally bringing into focus a possible end game for LeEco. That would see the company basically shutter all of its operations except for online video, with the listed company becoming the sole survivor of the ongoing crisis. That’s probably a slightly optimistic view, since the listed company may also be in turmoil, but I would give it a 50-50 chance of happening.