Pesticide Maker’s Social Media Gambit Hits a Wall

A Chinese pesticide and feed company backed out of a plan floated in April to pay 3.8 billion yuan ($592 million) for a basket of social networking accounts amid doubts from investors and regulators.

Shanghai-listed Zhejiang Huge Leaf Co. said its board turned down the proposal to acquire Shenzhen Quantum Cloud, an online advertising company whose core assets were 981 public accounts on WeChat, China’s popular mobile instant messaging service, according to a company filing Tuesday.

“The market and policy environments are changing,” and proceeding with the deal would pose uncertainties, said a person at the Huge Leaf board secretary’s office, adding that the company has no major asset reshuffling plans in the next month.

Huge Leaf proposed in April to take full control of Quantum Cloud for 3.8 billion yuan in cash and stock, eying the 240 million followers linked to accounts owned by the company. The offer valued each of those accounts — which offer content and services to subscribers — at more than $600,000.

With its major business in industrial sectors including sales of pesticides and feed additives, Huge Leaf was considering the deal as part of an effort to move into new business areas related to China’s mobile internet and social media boom. In early 2017, Huge Leaf took over an online game developer for 1.6 billion yuan.

The deal sparked heated debate on how China’s socializing tools are turning into big money-spinners and raised questions about whether Quantum Cloud was overvalued, as subscriber inflation has existed widely in China’s internet sector, analysts said.

Quantum Cloud posted revenue of 132 million yuan in 2016 and 235 million yuan in 2017, mainly from advertising on the accounts. Net profit was 87 million yuan in 2016 and 153 million yuan in 2017, according to the company.

The offer also caught the attention of stock exchange authorities, who in May questioned Huge Leaf on the valuation and potential risks. The regulatory concerns prompted Huge Leaf to lower the offer to a still sizeable 3.2 billion yuan.

The proposed Quantum Cloud deal was intended to integrate mobile and internet business promotion resources, enhance the listed company’s main business, and help gain entry points for online traffic, Huge Leaf’s controlling shareholder, Shen Peijin, told investors in April, according to stock exchange filings.

In 2017, Huge Leaf posted 1.3 billion yuan of revenue, of which traditional business contributed more than 80% of the total.

With its major business focus on the traditional sector, how the proposed deal would bring sustainable growth remained a question, said an industry insider close to Huge Leaf. In addition, doubts about the actual value of Quantum Cloud’s assets hindered the deal, he said.

Huge Leaf’s stock declined by the 10% daily limit Wednesday as it resumed trading after a suspension of almost a year, as the company began preparing for the transaction in November 2017.

Contact reporter Han Wei (weihan@caixin.com)