Bloomberg News

Tudou Owners Get World’s Best Deal Taking Youku Stock: Real M&A

March 13, 2012

Youku shareholders will own 71.5 percent of the combined entity, which will be named Youku Tudou Inc. Photographer: Nelson Ching/Bloomberg

Youku shareholders will own 71.5 percent of the combined entity, which will be named Youku Tudou Inc. Photographer: Nelson Ching/Bloomberg

Youku Inc. (YOKU), owner of China’s most- popular online video site, is giving shareholders of Tudou Holdings Ltd. the best deal in the world.

Tudou, which lost about half its value after going public in the U.S. in August, almost tripled this week after agreeing to sell itself for equity in Youku. With Beijing-based Youku reaching a seven-month high, the value of the takeover ballooned 40 percent to $1.29 billion, according to data compiled by Bloomberg. That’s the biggest increase among all-stock offers greater than a half-billion dollars in announced equity value.

While Youku is also paying the most expensive takeover premium among pending deals to combine China’s two biggest providers of online videos, its own advance is still giving arbitragers a chance to reap an 18 percent profit -- the most for comparable stock transactions globally. Together, Youku and Tudou account for a third of Web video advertising sales in a nation with more Internet users than the entire U.S. population and where access to Google Inc. (GOOG)’s YouTube is restricted.

“There are opportunities for arbitragers as far as the price gap,” Echo He, a New York-based analyst who covers Chinese Internet stocks for Maxim Group LLC, said in an telephone interview. “By combining these two companies, they will be a clear market leader and widen the gap between them and the runner-up. It’s a situation where the synergies mean one plus one is more than two.”

Yu Zhou, a spokesman for Shanghai-based Tudou, didn’t immediately return telephone calls or e-mailed requests seeking comment today. Jean Shao, a spokeswoman for Youku, referred to Chief Executive Officer Victor Koo’s remarks on the conference call announcing the deal and declined to comment further.

Couch Potato

“This deal creates a win-win,” Koo said on the call. “Both companies see tremendous value in coming together and believe the transaction represents the best value-creation opportunity for its respective shareholders.”

Youku, which means “excellent and cool” in Chinese, and Tudou, whose name refers to a couch potato in that language, have sites that let users watch movies, television shows and music videos, as well as user-generated clips, over the Internet.

They make money from advertising and are similar to Google’s YouTube and Hulu LLC, the online TV service owned by ABC, NBC and Fox, according to Maxim’s He.

Both Chinese companies are traded in the U.S., with Youku completing its initial public offering in December 2010 and Tudou selling shares in August. Owners of Tudou’s American depositary receipts will get 1.595 ADRs of Youku for each Tudou ADR they hold, the companies said in a statement on March 12.

Relative Value

Youku shareholders will own 71.5 percent of the combined entity, which will be named Youku Tudou Inc. Shareholders of both companies need to approve the deal, which is expected to be completed in the third quarter.

Based on Youku’s average price in the 20 days before the announcement, the agreement valued Tudou at $37.03 a share, 160 percent more than its 20-day average, data compiled by Bloomberg show. ADRs represent ownership stakes in overseas companies, issued by U.S. banks, which usually trade on American exchanges.

The premium for Tudou is almost seven times more than the average that acquirers in pending stock takeovers worth more than $500 million have agreed to pay, the data show.

While shares of Tudou soared 176 percent to $42.50 in the two days after the agreement was announced, Youku’s stock also gained 25 percent, lifting the offer price to $50.05 a share. Youku’s advance has increased the takeover value of shares held by Tudou owners by about $369 million, the most of any similar- sized stock agreement on a percentage basis.

Deal Rationale

The $7.55-a-share gap to Youku’s offer price also indicates that arbitragers can still earn a greater windfall from betting on the takeover than any other pending stock transaction of more than a half-billion dollars, data compiled by Bloomberg show.

Youku’s acquisition of Tudou (TUDO) will enable the company to extend its lead as demand increases for online videos in China, which had 513 million Internet users as of Dec. 31, according to the China Internet Network Information Center.

Youku accounted for about 22 percent of the nation’s online video advertising revenue in the fourth quarter, while Tudou had a 14 percent share, research firm Analysys International said. Inc., owner of China’s third-biggest Internet search engine, had 13 percent and Baidu Inc., the nation’s largest search engine, had 6.9 percent.

By acquiring Tudou, Youku will attract more advertising dollars and give it an advantage as online-video providers spend more on programming to lure viewers, according to Maxim’s He.

Content Expenses

Buying content and increasing the speed that it can be streamed over the Internet are some of the biggest costs facing online-video providers, according to Andy Yeung, a New York- based analyst for Oppenheimer & Co.

Selling to Youku would also help shareholders of Tudou, which has yet to turn an annual profit and had tumbled 47 percent before the transaction was announced. Michael Xu, a senior vice president at Youku, said during the conference call that the deal would cut as much as $60 million a year in costs.

“With this, we’re seeing industry consolidation that will potentially make the industry healthier,” Oppenheimer’s Yeung said in a telephone interview. “That’s why the reaction from investors was positive for both Youku and Tudou.”

One reason the gap between Tudou and Youku’s offer price remains so wide is because some traders may be wary of companies based in China, where the regulatory process is less transparent than in the U.S., according to Louis Meyer, a New York-based special-situations analyst at Oscar Gruss & Son Inc.

Opportunity Cost

“It’s not like the U.S. where you know the process well,” he said in a telephone interview. “You’ve got some things that cannot be handicapped as tightly as you do with a U.S. deal. There’s no way you can just plow into this one.”

For Oppenheimer’s Yeung, the trepidation is creating an opportunity that is worth betting on.

“We view the transaction positively,” he said. “It’s easy to take advantage of this arbitrage opportunity if you can find the shares to do it.”

To contact the reporter on this story: Tara Lachapelle in New York at

To contact the editors responsible for this story: Daniel Hauck at; Katherine Snyder at

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