INTERNET: Tencent Raises More Cash, Activision in Sight?

Bottom line: Tencent’s recent cash-raising frenzy probably signals a major equity investment coming in the next few months, with a merged Meituan-Dianping or Activision as the most likely targets.

Tencent raises more cash via syndicated loan

Tencent (HKEx: 700) may be the lowest-key of China’s big 3 Internet companies, but the company has been far louder on the money- raising scene by borrowing billions of dollars in cash lately. The social networking (SNS) giant has raised billions through a series of bond issues over the last year, and now looks set to raise another $1.5 billion through a syndicated loan that it’s reportedly negotiating with several major western lenders.

All this raises the question of what exactly Tencent is targeting with all the new cash. The company has been the least acquisitive of China’s big 3 Internet companies, which include itself, Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU), amid a major consolidation in China’s Internet over the last 2 years.

Last week I speculated that Tencent might be preparing to bid for China’s leading group buying site, which is being formed through the recently announced merger of industry leaders Dianping and Meituan. But an even more intriguing possibility might be a bid to boost its ownership of Activision Blizzard (Nasdaq: ATVI), or even a bid to buy the leading global game developer outright.

We’ll return to a discussion of Tencent’s M&A targets shortly, but first let’s review the latest headlines that say the company is in discussions with several major international lenders for the syndicated loan worth up to $1.5 billion. (English article; Chinese article) Banks that would be part of the syndicate include Australia & New Zealand Banking Group, as well as Citigroup, HSBC and Japan’s Mizuho.

Building a Warchest

Word of the deal is coming from banking sources, which only say that Tencent plans to use the money for the usual corporate purposes and acquisitions. The new funds would add to Tencent’s existing massive cash pile, which totaled nearly 70 billion yuan ($11 billion) at the end of June. A big portion of that cash has come through a $10 billion bond program that Tencent first announced last year, and has been slowly implementing since then. (previous post)

Unlike Alibaba and Baidu, Tencent has been relatively conservative in its M&A over the last 2 years. The company has purchased large strategic stakes in a few companies, most notably e-commerce giant JD.com (Nasdaq: JD). But none of those purchases have been that big, totaling in the hundreds of millions of dollars at most. All that brings us to the question of what exactly Tencent wants to do with all this cash, since the company is currently quite profitable and hardly needs the money for day-to-day operations.

The most likely answer would be a bid for the new company being formed by the merger of group buying sites Dianping and Meituan. Last week word emerged that Tencent was in talks to provide $1 billion in new funding for the company, a move that would add to an existing stake through its earlier pre-merger investment in Dianping. (previous post) That led me to speculate that Tencent could ultimately bid for control of the new company, which was reportedly worth as much as $20 billion based on the latest funding.

While a bid for Meituan-Dianping looks like the most likely target for Tencent’s recent fund-raising frenzy, a more intriguing prospect could be a bid for Activision Blizzard. Tencent previously bought 6 percent of the US gaming giant in 2013, reportedly paying $1.4 billion as part of a management-led buyout of the company from its previous owner, France’s Vivendi (Paris: VIV).

Activision is currently worth $25 billion, which would be quite a lot for even Tencent to afford. But Tencent already has a close relationship with the US gaming giant through their previous equity tie-up, and also a wide range of game licensing deals. Accordingly, a boosting of their alliance through an increase of Tencent’s share in Activision Blizzard would certainly seem logical, especially in light of Tencent’s recent voracious appetite for cash raising.

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