Mar 13, 2012 06:26 PM

Youku-Tudou Merger Shows Sector in Trouble, Analyst Says


(Beijing) – The merger of China's two major video portals indicates the days of fast growth in the industry are gone, an analyst tells Caixin.

On March 12, Youku Inc. (NYSE:YOKU) and Tudou Holdings Ltd. (NASDAQ: TUDO) announced an all-stock deal expected to be worth more than US$ 1 billion.

A senior executive at a video website said most such sites in China will have to save cash this year to cope with increasing financing difficulty as capital lost interest in the sector.

The deal involving Youku and Tudou may not necessarily create a larger user base, but would significantly cut marketing expenses and copyright and management costs, said the executive, who declined to be named.

The deal would save a large amount of cash for Youku, while Tudou shareholders would benefit from a boost to stock value, the executive said.

The business models of China's video websites are still subject to great uncertainties, but what was certain was that the deal would create a premium for Tudou's stock value, said Wang Ran, chief executive of China eCapital Corporation, a privately held investment bank.

Based on the closing price of Youku shares at the end of last week, Tudou's value in the new company will amount to US$ 1.14 billion. At the end of last week it had capitalization of US$ 436 million.
Youku leads China's fragmented online video market with a 21.8 percent share, consultancy Analysys International said. Tudou's share was 13.7 percent.

Amid the tough competition, Tudou shares, which debuted in August, have traded below the IPO price of US$ 29 each.

Youku had been negotiating a merger with iQiyi, an online video platform backed by search engine Baidu Inc. (NASDAQ: BIDU).

While insisting his company would not be affected, iQiyi CEO Gong Yu said on his microblog that the merger would be conducive to the industry's healthy development.

Under the terms of the merger, Youku stock and American depositary shareholders (ADS) will own around 71.5 percent of the new company, with the rest held by Tudou shareholders and ADS holders. Tudou will be delisted from the Nasdaq Stock Market after the merger.

In a conference call, Youku founder and CEO Gu Yongqiang said the new firm aimed to outgrow its competitors, but he declined say when it would turn a profit.

This month, both companies reported a net loss for 2011, mostly due to rising costs for content and Internet bandwidth.

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