Alibaba raises cash; Tencent ties with Warner

Alibaba's new mega bond will pressure it to find good uses for its huge cash pile, while Tencent's Warner Music tie-up is part of a new wave of deals to monetize its SNS platforms.

Doug Young

Published: 1:41pm, 16 Nov 2014

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Leading Internet companies Alibaba (NYSE: BABA) and Tencent (0700.HK) are both in the headlines today with major new deals, spotlighting their growing need to stay in the news to remind investors why they are valued so high. The larger of the two news bits has Alibaba planning to raise a hefty $8 billion (HK$62 billion) through a bond offer, while the other has Tencent in a major new tie-up with Warner Music, one of the world's top record labels.

I was mostly impressed by the sheer size of Alibaba's bond offer plan, which is easily the largest I've seen by a Chinese Internet company. Tencent launched its own $5 billion bond program earlier this year, but has had to offer the notes in several tranches due to the huge size. Baidu raised its own $1.5 billion in a bond offer two years ago, and in June announced plans for another major offering without specifying any specific fund-raising targets.

Alibaba's official announcement only said that it planned to issue bonds, but other media reported the company was aiming to raise up to $8 billion through the offering in the US. Alibaba said it would use proceeds from the offering to refinance existing credit facilities.

The huge new bond would come just two months after Alibaba raised a whopping $25 billion in its New York IPO -- the largest public offering of all time. It's worth noting that much of the proceeds from that offering went to Alibaba's two largest stakeholders, Yahoo (Nasdaq: YHOO) and Softbank (Tokyo: 9984). Still, the company is hardly in need of money right now, and said in its maiden quarterly earnings report last week that it had nearly $18 billion in cash at the end of September.

So, why is Alibaba doing this when it clearly doesn't need the money? The answer is: Because it can. The same is also true for Tencent and Baidu, which are able to attract big investor dollars due to the huge wave of positive sentiment towards the Chinese Internet. All three companies are playing on that sentiment to raise new money on very attractive terms, which looks like a smart move. But over the longer term, the raising of so much money will also put pressure on these companies to put the funds to use -- something that may become difficult due to the sheer size of their multibillion-dollar cash piles.

Next, let's look at the Tencent news that will see it form a tie-up to offer Warner's music in China. Under the deal, Tencent itself will distribute Warner's music in China, and will also become Warner's main distributor to other Chinese music services. The deal excludes China's three major telcos, which will continue to work directly with Warner on their own music distribution deals.

Tencent certainly looks like the best partner for Warner among China's major Internet companies. Its popular QQ instant messaging service already has a music streaming unit, and its other popular gaming and WeChat platforms also look well positioned to reach the kinds of young audiences that like to buy and listen to music online. Baidu signed its own agreement with Warner Music three years ago, but I expect that deal has probably expired and Warner is now placing its longer-term China bets with Tencent.

I doubt this actual deal will have much impact on Tencent's financial performance, since music streaming isn't one of its biggest money earners. But from a broader perspective, this is the kind of deal that Tencent will need to sign as it tries to build up a wide-ranging ecosystem of revenue-generating products and services around its popular social networking (SNS) platforms. Accordingly, we can probably expect to see Tencent announce a steady stream of similar content- and service-related deals in the years ahead.

Bottom line: Alibaba's new mega bond will pressure it to find good uses for its huge cash pile, while Tencent's Warner Music tie-up is part of a new wave of deals to monetize its SNS platforms.

To read more commentaries from Doug Young, visit youngchinabiz.com

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