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Financial dramedy

16 October 2015 By John Foley

The main thing streaming at video site Youku Tudou on Oct. 16 will be tears of relief. Alibaba, China’s biggest e-commerce company, has offered to buy the 82 percent of the company it doesn’t already own, at a 30 percent premium to the market price. A deal would end Youku’s loss-making run as a public company and help Alibaba realise its multi-screen strategy. Oh, and it should create value. Though that bit is most likely an afterthought.

Youku is the dominant force in Chinese online video – effectively the YouTube of the People’s Republic. Like YouTube, it has never reported a profit. Aside from advertising fees, the company is now charging users to watch its best content, but that means giving them something worth watching. Content fees increased 78 percent over the last year to 744 million yuan ($117 million) in the latest quarter. Larger rivals like Baidu, a search engine that also owns an online video site, can swallow those costs with ease. Not so for tiny Youku.

In an industry awash with new paradigms, it seems churlish to consider whether the deal creates value for Alibaba shareholders. As it happens, it probably does. The 30 percent premium is worth around $1.2 billion. Yet Youku’s bandwidth costs alone – what it pays for telecoms and data storage – are an annualised $213 million. If data colossus Alibaba can knock those out, the savings, taxed at Youku’s 15 percent rate and capitalised, are worth more than $1.8 billion.

Beyond that, the benefits of the deal are fairly abstract. Perhaps Alibaba will create its own Chinese answer to U.S. pay-TV site Netflix. Perhaps it will sell more video advertising spots to its online sellers. The two may even realise the slightly scary-sounding ideal of using shoppers’ online activity to create programming that taps their innermost consumer desires. The sky is theoretically the limit.

But really, who cares? Youku is less than 3 percent of the combined companies’ market value. And approval is a given, since almost 60 percent of the shares are held by Alibaba and supporters including Youku boss Victor Koo, who will also receive an undisclosed package for staying on as chairman. As always in Chinese internet companies, the best seats in the house are reserved for insiders.

 

 

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