Alibaba seeks full ownership of video platform Youku Tudou

Alibaba and Yunfeng Capital - a PE firm co-founded by Jack Ma, Alibaba's executive chairman - acquired a combined 18.5% stake in Youku Tudou for $1.22 billion in April 2014. Alibaba took a 16.5% interest with Yunfeng holding the remaining 2%. As of March 2015, their investment vehicle owned 20.7% of the company.

Now Alibaba, which holds 18.3% of Youku Tudou on its own, is offering to pay $26.60 per American Depository Share (ADS) to take the company private. This represents a 30.2% premium to the October 15 closing price and a 12.8% discount to the price at which Alibaba and Yunfeng invested last year. Alibaba will fund the transaction with cash on hand.

According to a regulatory filing, Victor Koo, the founder, chairman and CEO of Youku Tudou, and Chengwei Ventures have agreed to vote in favor of the Alibaba transaction. Together they own an 18.5% equity stake but have 48% of the voting power due to the company's dual shareholding structure. Koo would remain with the business as chairman and CEO.

Chengwei was Youku's first institutional investor in 2005 alongside Farallon Capital Management and it participated in each of the five subsequent funding rounds ahead of the company's IPO in late 2010. At least one of the Chengwei funds that still hold an interest in Youku Tudou is an evergreen vehicle. GGV Capital, an investor in Tudou since 2006, has a 1.5% stake in Youku Tudou.

Youku and Tudou were leading independent forces in China's online video market and went public in 2010 and 2011, respectively, having received more than $300 million in private equity and venture capital funding between them. They agreed to merge in 2012 in a 100% stock-to-stock transaction worth more than $1 billion. At the time, the combined entity had an over 35% share of the online video market.

The merger was in a large part driven by a need to rein in escalating costs, specifically for bandwidth and content. However, even post-merger, the business has yet to turn a profit. Net losses grew from RMB402.6 million ($63.4 million) in 2012 to RMB600.1 million and RMB837.5 million over the next two years.

Revenue came to RMB4.22 billion in 2014, up from RMB1.91 billion in 2012, but the cost of revenues also more than doubled. Content costs reached RMB2.1 billion in 2014, up from RMB829.5 million in 2012, while bandwidth costs jumped from RMB524.6 million to RMB917.3 million over the same period.

There are natural synergies between Alibaba and Youku Tudou. The former has a strong presence in e-commerce, media and advertising, and is looking to diversify its business through a digital entertainment strategy. The latter has a large user base that could be expanded further and a need to control costs.

"We believe that the proposed transaction, with tighter integration of our resources, will help Youku achieve exciting growth in the years ahead by leveraging Alibaba's assets in living-room entertainment, e-commerce, advertising and data analytics. Digital products, especially video, are just as important as physical goods in e-commerce, and Youku's high-quality video content will be a core component of Alibaba's digital product offering in the future," Daniel Zhang, CEO of Alibaba, said in a statement.

This is not the first example of strategic activity by China's leading internet companies in the online video space. Two years ago, Baidu agreed to pay $370 million for PPS' online video business, creating an exit opportunity for several venture capital investors. The search giant then combined the PPS unit with iQiyi, an advertising-supported online television and movie portal it fully acquired in 2012.

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• Topics
• Exits
• Technology
• Consumer
• Greater China
• M&A
• China
• Trade sale
• Venture
• TMT
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• Alibaba Group
• Chengwei Ventures Shanghai
• GGV Capital