Orphans Xunlei, 55tuan In New Courtships

Xunlei, 55tuan look for bargain hunters

Xunlei and 55tuan have emerged as 2 of the biggest orphans in the rapidly consolidating online video and group buying spaces, respectively, putting pressure on both to find partners to boost their chances for long-term survival. The pair were in separate headlines this week in their search for new tie-ups, with Xunlei selling a major stake of itself to software maker Kingsoft (HKEx: 3888) and 55tuan reportedly in talks to sell some or all of itself to security software maker Qihoo 360 (NYSE: QIHU).

Neither of these tie-ups looks very logical to me, since the core software businesses of Kingsoft and Qihoo aren’t really a strong match for the Internet services provided by Xunlei and 55tuan. But in the current climate of consolidation where any tech firm with cash is racing to make new purchases, these latest 2 deals don’t look all that unusual.

Let’s start with Xunlei, which was once a hot commodity when investors were plowing hundreds of millions of dollars into China’s fast-growing video sharing sector. Xunlei tried at least twice to launch New York IPOs, only to see the deals implode due to a chilly market and also copyright violation issues. Reports last month had Xunlei receiving $25 million in new funds from savvy smartphone maker Xiaomi, and said the company was planning a new listing attempt in New York for the second or third quarter of this year. (previous post)

Now the latest reports are saying that Kingsoft, which has close ties to Xiaomi, has paid $90 million for 29 percent of a series of preferred shares issued by Xunlei. (Chinese article) If Kingsoft converted the stake to ordinary shares, it would get about 10 percent of Xunlei’s ordinary stock, implying a total market value for Xunlei of about $900 million.

The pair of investments by Xiaomi and now Kingsoft appear to indicate that Xiaomi’s charistmatic CEO and co-founder Lei Jun, who is also a major stakeholder in Kingsoft, has some plans for an outright purchase or strategic tie-up with Xunlei. Xiaomi is making a strong push into Internet TV, so Xunlei could become an important programming channel for that campaign. We’ll have to wait and see what happens in this evolving tie-up, though I suspect that Xunlei may cease to exist as an independent video site by the end of this year.

Next let’s take a quick look at 55tuan, which has become one of the few remaining mid-sized orphans in the group buying space. Most smaller players and many mid-sized ones have closed over the last year, leaving just a handful of players led by Meituan and Dianping. The latest reports are rather sketchy, saying only that 55tuan is in talks for a possible deal to sell itself to Qihoo 360. (English article)

Qihoo was in talks to buy Sohu’s (Nasdaq: SOHU) Sogou search engine for much of last year, but ultimately lost in a bidding war to Internet giant Tencent (HKEx: 700). That deal made much more sense for Qihoo, which could have combined Sogou with its own fast-growing online search site that competes with industry leader Baidu (Nasdaq: BIDU). By comparison, I don’t really see too many synergies in a purchase of 55tuan, whose group buying business doesn’t really complement any of Qihoo’s existing major units.

Qihoo did raise $600 million through a convertible bond offering last fall, and had around $1 billion in cash at the end of last year, so it certainly has plenty of money for acquisitions. Perhaps 55tuan is quickly running out of money and in danger of closing, and thus is offering to sell itself for a bargain price. But I honestly don’t see Qihoo ultimately wanting to make this purchase, and would advise 55tuan to look elsewhere as it races to find new backers who can help it stay in business.

Bottom line: Kingsoft’s purchase of a stake in Xunlei could auger a strategic tie-up with smartphone maker Xiaomi, while Qihoo’s reported talks to buy 55tuan are unlikely to result in a deal.

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