Tencent bonds: Activision in view?
Update: A short time after I issued this article, Tencent released its formal plan to issue US$600 million worth of bonds. The notes will mature in 2018 and carry an interest rate of 3.375 percent.
Internet leader Tencent (0700.HK) is taking a dip into the corporate bond market, an interesting move that should not only test investor aippetite for a new kind of financial product from China's Internet space, but may also hint at the company's future M&A plans as it explores a potential bid for Activision Blizzard (Nasdaq: ATVI). Longtime China Internet watchers may recall that it's been quite a long time since any companies from this space have issued corporate debt. Veteran players Sina (Nasdaq: SINA), Sohu (Nasdaq: SOHU) and NetEase (Nasdaq: NTES) all issued bonds shortly after becoming profitable about a decade ago, but none really needed the money and largely retired the fund-raising method after that.
A big part of the problem for these companies is that investors are often hesitant to buy bonds from companies with such a short operating history, since there's no guarantee those companies will survive long enough to repay their debt. In Tencent's case, the company clearly feels it has a long enough history now that investors will take its potential offering seriously. It also has the added motivation of potentially needing cash for a possible bid for Activision Blizzard, the world's largest video game designer whose current owner Vivendi (Paris: VIV) is looking to sell the company. (previous post)
Let's take a look at the actual news, which had Tencent issuing a statement saying proposing a note offering outside of China, meaning the offering would most likely be denominated in US dollars. The announcement didn't offer much additional detail, except to say the bonds will be listed on the Hong Kong stock exchange, implying that buyers would be major international investors.
In what looks like a coordinated move, S&P put out its own announcement around the same time saying Tencent's future notes would be rated BBB+, 2 notches above "junk" status and a relatively good rating for such a young company. In explaining its decision for the rating, S&P said one of the biggest cautionary factors is Tencent's relatively short operating history, even though the company is clearly quite profitable and has the necessary cash flow to repay any bonds, at least for right now.
Obviously we'll have to see the size of the bond offering and its terms, but I would expect demand to be relatively strong if Tencent offers a good interest rate and keeps the size relatively modest, perhaps at US$1.5 billion or less. While such a move looks like a good one for a company like Tencent, I wouldn't expect to see too many more Chinese Internet companies making similar offers, simply because investor sentiment remains incredibly weak towards such firms.
Both Tencent itself and S&P say the funds will be used for general corporate purposes, but I suspect such purposes could also eventually include M&A if and when Tencent moves ahead with a bid for Activision Blizzard. I previously said such a purchase would be a good match, since Tencent is China's biggest online game firm and Activision is the world's top game designer.
In a nod to their compatibility, the 2 companies announced a strategic tie-up last month, starting with Tencent's licensing of an Activision game. But with a market cap of more than US$13 billion, any purchase of Activision won't be cheap, and this new bond issue could just be a prelude to a much bigger similar exercise by Tencent if a merger deal finally materializes.
Bottom line: Tencent's proposed bond issue is likely to meet with solid investor demand, and could be a prelude to a larger fund raising if it proceeds with a bid for Activision Blizzard.