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PUBLISHED : Wednesday, 15 May, 2013, 2:13pm
UPDATED : Wednesday, 15 May, 2013, 2:13pm

Internet M&A heats up with Sohu, PPTV talk

Sohu's rumoured talks to combine its video business with PPTV could create a solid new player in the space, as a new Internet M&A wave acclerates

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”
 

I've written too much about neglected web portal Sohu (Nasdaq: SOHU) recently, but the latest rumours of a potential tie-up between the company and PPTV, operator of one of China's leading video websites, are just too irresistible for me to ignore. Those rumours say Sohu is in talks to combine its own online video business with PPTV to create one of the nation's top three players. News of such talks comes just a couple of weeks after leading search engine Baidu (Nasdaq: BIDU) purchased another top video site, PPS, for US$370 million, and indicates a new wave of consolidation in China's Internet space may be gaining momentum.

As I said at the outset, I've written quite a bit about Sohu in the last week, as this neglected company is suddenly appearing at the heart of several M&A rumours. That's because Sohu, despite its failure to break into the ranks of China top Internet firms, still owns a number of solid, second-tier assets that look like attractive M&A targets for bigger firms. Those assets include a major video sharing site, an online gaming unit, a search engine and one of China's oldest and best-known web portals.

The company's ownership of so many attractive assets, combined with other comments that its founder Charles Zhang might be tiring of running the business, led me to speculate earlier this week that perhaps the company was headed for a breakup. The reports on the latest rumours involving PPTV, which operates a service called PPLive, are quite vague and seem to be coming from PPLive rather than Sohu.

According to the reports, PPTV is looking at a number of options for its business, including a possible combination with Sohu's video business. The reports cite PPTV chief Tao Chuang, who is quoted saying only that his company could consider an IPO but also might seek a strategic investment partner. Tao also reveals that his company stopped losing money in last year's fourth-quarter and hopes to become profitable for all of 2013.

My instincts tell me that some kind of talks are probably occurring between Sohu and PPTV, though it's obviously too early to say if we'll see a tie-up. I suspect a tie-up is indeed in the works and will probably be announced in the next month or two, with Sohu investing perhaps US$100-$300 million for a controlling stake of PPTV.

Sohu would then combine its own video business with PPTV into a single online video company, with an aim to making an IPO for the new company as a standalone business by the end of this year. Sohu has previously said it wants to spin off and separately list its online video business in the US, but hasn't been able to doing so due to a chilly investor climate towards China stocks. This new combination could create a solid new player in the market, and possibly even one that could be profitable this year.

Such a development would be consistent with the Sohu break-up that I previously mentioned, as Zhang looks to spin off all of his company's units. A top Sohu executive confirmed last week that the company was in talks to sell its Sogou search engine, with Qihoo 360 (NYSE: QIHU) as the leading candidate to buy the unit. Sohu's online game business is also already a separately listed company, Changyou (Nasdaq: CYOU).

This latest move would be part of a broader wave of M&A in China's fragmented Internet space, which has been sorely needed for the last few years. That wave has seen e-commerce leader Alibaba announce two major deals in the last three weeks, and Baidu has also indicated it is in the market for more deals following the PPS purchase. These latest Sohu talks, if true, would continue the trend, which should see some exciting new combinations in the months ahead.

Bottom line: Sohu's rumoured talks to combine its video business with PPTV could create a solid new player in the space, as a new Internet M&A wave acclerates.

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

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