INTERNET: Xiaomi Boosts Xunlei Ties, Buyout Offer Coming?

Bottom line: Xunlei’s growing ties with Xiaomi could presage a buyout bid for the former by the latter, as Xiaomi seeks partners and acquisitions to help it realize its goal of building an ecosystem of Internet services and related devices.

Xiaomi, Xunlei launch Xingyu

A year-old alliance between smartphone sensation Xiaomi and online video operator Xunlei (Nasdaq: XNET) has entered a new phase, with news that the pair have formed a content distribution service. That plan, which will see the pair launch a new brand called Xingyu, is part of Xiaomi’s efforts to create an ecosystem of Internet-based services like online video for its smartphones and other devices like smart TVs and set-top boxes.

This latest move isn’t a big surprise, and comes after Xiaomi purchased 30 percent of Xunlei almost exactly a year ago at the time of Xunlei’s New York IPO that met with a cool reception. Xunlei’s shares have been quite volatile since then, losing almost half their value before rebounding over the last few months to return to their IPO level. But a recent wave of buy-out offers for many US-listed Chinese companies, combined with this growing alliance, is raising the interesting possibility that Xiaomi might soon lead a bid to privatize Xunlei or perhaps buy the company outright.

Let’s begin with news of the creation of the Xingu brand, which will focus on the delivery of gaming and video products over the Internet, with a focus on hardware that can provide a good experience even over weak broadband connections. (English article; Chinese article) The alliance is centered on a Xunlei product that helps to boost Internet speeds even when connections are poor, and not surprisingly that product is currently available on Xiaomi smartphones.

This new alliance looks rather ho-hum, but what’s more interesting is the growing ties that it represents between Xiaomi and Xunlei. China’s online video market has undergone rapid changes over the last 2 years, resulting in nearly all video sharing companies either being acquired outright or selling major stakes to larger companies.

Former industry leader Youku Tudou (NYSE: YOKU) previously sold a major stake in itself to leading e-commerce company Alibaba (NYSE: BABA), and leading search engine Baidu (Nasdaq: BIDU) also made a major acquisition with its purchase of a service called PPS in 2013. Xunlei was quickly becoming the only major video provider without a wealthy partner when Xiaomi stepped in last year to purchase its 30 percent stake in the company.

Buyout in the Offing?

That brings us to what the future might hold for Xunlei in terms of its New York-listed shares. Followers of US-listed Chinese Internet companies will know that many have launched privatization plans over the last 3 months, after their shares failed to find an audience in New York and China’s own stock markets boomed. That wave of buyout bids may be at least partly behind a recent rally in Xunlei’s own shares, which have roughly doubled over the last 3 months.

Even after the rally, Xunlei still has a relatively modest market value of about $800 million. If we assume that roughly half of its shares are held by Xiaomi and company insiders, that means a buyout of its shares listed in the US and held by other investors would probably cost about $400-$500 million based on Xunlei’s current price.

Xiaomi certainly has plenty of cash for such a buyout, following its raising of $1.1 billion late last year. The company was riding high at that time as it rocketed to become the world’s third biggest smartphone maker just 4 years after its founding. But since then it has hit a number of setbacks, and has largely fallen from the headlines. A buyout offer for Xunlei would certainly help to propel it back into the headlines that used to come so easily for the company, and even looks like a smart and affordable move as it tries to build a broader ecosystem of Internet-based services and devices.

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