Unique: Alibaba, Tencent has suspended talks to purchase iQIYI shares because of pricing and regulatory issues – sources

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© Reuters. A logo of the Alibaba Group can be seen during the World Internet Conference (WIC) in Wuzhen

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By Julie Zhu, Yingzhi Yang, Zhang Yan and Yilei Sun.

HONG KONG / BEIJING (Reuters) – Alibaba (NYSE 🙂 Group Holding Ltd and Tencent Holdings (OTC 🙂 Ltd have each had separate discussions with Baidu Inc (NASDAQ 🙂 to acquire a majority stake in the video streaming service iQIYI Inc, knowledgeable people told Reuters.

However, the discussions stalled with little hope of resumption once they oppose a valuation of around $ 20 billion required by Baidu and both companies, which have their own video streaming services, are scrutinized by China's antitrust authorities two people said.

Another Chinese tech giant, TikTok owner ByteDance, has been investigating internally the possibility of acquiring a majority stake in iQIYI, three sources said.

IQIYI, listed on the Nasdaq, is China's equivalent of Netflix Inc (NASDAQ 🙂 and has a market capitalization of $ 16.4 billion, which corresponds to a 56.2% share of Baidu of around $ 9.2 billion .

Tencent, whose interest in iQIYI was first reported by Reuters in June, believes the company is worth about half what Baidu wants, two respondents said.

IQIYI's shares fell 1.7% on Friday.

Baidu, iQIYI and Tencent declined to comment on the deal talks. ByteDance declined to comment on the scope of its interest in iQIYI. Alibaba did not respond to a request for comment.

While it is the second largest player in the Chinese video streaming market, iQIYI has not yet broken even in its 10 year history. The latest quarterly results showed declines in sales and subscribers, penalizing stocks, which have lost nearly a fifth of their value in the past two weeks.

It is also under investigation by the US Securities and Exchange Commission after a report by short seller Wolfpack Research in April accused iQIYI of increasing the numbers. iQIYI, who works with the probe, said an internal review found no evidence to support Wolfpack's claims.

The video streaming service, whose cash and cash equivalents nearly halved to 3.16 billion yuan ($ 481 million) in the nine months ended September, plans to raise at least $ 1 billion in the coming months, said a person with direct knowledge of the matter.

It could come in the form of a stock offering or a convertible bond or both, the person said, adding that the company's recent stock slide has clouded its funding prospects.

iQIYI did not immediately respond to a request for comment on its donation plans. Baidu said in a statement that as an independent publicly traded company, iQIYI has smooth funding channels in the capital markets and iQIYI's support has not changed.

REGULATORY HEAD WINCH

Investing in iQIYI could be politically difficult for Alibaba and Tencent now after Beijing released draft guidelines this month to prevent Internet company monopoly. The scope of the draft ranges from big data to payment services.

That came immediately after regulators were shocked to curb Alibaba subsidiary Ant Group's $ 37 billion initial public offering just days before its debut in a staggering reprimand for Ant and Alibaba founder Jack Ma.

"After regulators published new fintech and antitrust regulations that will affect Alibaba's business, Alibaba's management is currently reluctant to close big deals," one person said.

The purchase of iQIYI will give ByteDance, which makes most of its profits from the short video app Douyin, the Chinese version of TikTok, the opportunity to enter the main market for longer-running TV shows and films.

There is a separate video platform, Xigua, which mainly offers 1 to 30 minute videos, an area where investment is to be increased.

Baidu, which holds more than 90% of the voting rights of iQIYI shareholders, is unlikely to consider ByteDance a buyer in the face of a year-long feud between the two companies in the Chinese digital advertising market, two sources said.

The search engine giant's interest in selling its stake in iQIYI stems from a shift in focus to the development of artificial intelligence and autonomous driving – areas that require high upfront investments.

Tencent Video was ranked the top player in the Chinese video streaming market with a penetration rate of 45% at the end of 2019, followed by iQIYI with 43% and Alibaba's Youku with 27%, according to research firm BlueCatData.

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