Tencent offers to take Chinese search engine Sogou private as US-China relations worsen

Tencent, Sogou’s biggest shareholder, offers to pay US$9 a share for US-listed search engine operator
Offer marks latest take-private transaction for a US-listed Chinese company amid strained relations between Washington and Beijing

Mergers & Acquisitions

Chad BrayandIris Deng

Published: 9:42am, 28 Jul 2020

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Tencent Holdings made a preliminary, non-binding offer late Monday to take search engine Sogou private, the latest move to privatise a Chinese tech company as tensions worsen between Washington and Beijing.

Sogou said Tencent, its biggest shareholder, offered to pay US$9 a share for the shares of the search engine operator it does not already own, representing a 57 per cent premium to its closing price on Friday. The company’s American depositary shares closed up 48 per cent at US$8.51 on Monday, valuing it at US$3.3 billion.

The Beijing-headquartered company said a special committee of its independent directors would consider the proposal, but it had not “made any decisions” regarding the offer.

“There can be no assurance that Tencent will make any definitive offer to Sogou, that any definitive agreement relating to the proposal letter will be entered into between Sogou and Tencent, or that the proposed transaction or any other similar transaction will be approved or consummated,” Sogou said in a statement.

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Sogou, which has nearly 2,800 employees, was founded in 2005 and its controlling shareholder is Sohu, the Chinese video, internet search and online gaming group was founded by Charles Zhang.

The company listed in the US in 2017 and Tencent has been its biggest shareholder since 2013. It also serves as the default search engine for a range of Tencent products, as well as WeChat, as part of an ongoing collaboration agreement.

Tencent beneficially owns 39.2 per cent of Sogou’s outstanding shares and controls 52.3 per cent of its voting power, according to its proposal letter.

The Shenzhen-based tech giant said it had entered into an agreement with Mr. Zhang, Sogou’s chairman and chief executive, to vote in favour of the transaction. Mr. Zhang owns 6.4 per cent of the company’s outstanding shares.

Sohu said in a statement late Monday that its board had not reviewed or evaluated the offer in detail or made “any determination as to how to respond to the proposal or as to whether or not the proposed acquisition of Sogou would be in the best interests of Sohu.”

Tencent said it intends to make the purchase with cash on hand and has engaged Goldman Sachs as an adviser on the transaction.

“We believe that the transaction will provide superior value to the company’s shareholders,” Martin Lau, Tencent’s president, said in the letter. “In considering this proposal, you should be aware that we are interested only in pursuing the transaction and we do not intend to sell our stake in the company to any third party.”

Jefferies analyst Thomas Chong said the proposal was a “surprise to the street” as analysts had not been anticipated that Tencent would privatise the search engine even though there have been a number of privatisation moves this year.

“We expect there will be more synergies between the two companies in search and smart devices in the future upon completion,” Chong said in a research note on Monday.

Since 2016, several large Chinese technology companies have delisted from American bourses, only to re-emerge with mainland listings.

Chinese internet security firm Qihoo 360 Technology left the New York Stock Exchange in 2016 and moved to Shanghai with a back-door listing in 2018. Semiconductor Manufacturing International Corporation (SMIC), China’s biggest chip maker, surged in its debut in Shanghai this month after delisting from the US last year.

The offer comes as relations between Washington and Beijing are increasingly strained following an extended trade war between the world’s two biggest economies and the passage of a controversial national security law for Hong Kong.

In May, the US Senate passed legislation that could force Chinese companies to delist from American bourses if they do not submit their audits for review by a US oversight board. Last week, the Trump administration ordered China to close its consulate in Houston, accusing the consulate of being an “epicentre” of economic espionage and theft.

“As recent frictions between the US and China continue to grow, with a number of American politicians calling for the delisting of Chinese firms trading on US bourses, Hong Kong-listed Tencent may been keen to mitigate risk by simply taking Sogou private,” said Mark Natkin, managing director of Marbridge Consulting, a Beijing market research and consulting firm focused on technology firms.

Natikin said the the timing also is good as Sogou’s share price, once as high as almost US$14 a share – had been trading at a historical low of less than US$3 in late May.

The heightened tensions have caused a number of Chinese companies to consider secondary listings closer to home in Hong Kong or to pursue so-called take-private deals.

New economy companies JD.com and NetEase raised more than US$6 billion combined with secondary listings in Hong Kong in June, following a US$12.9 billion secondary listing last year by Alibaba Group Holding, the parent company of the South China Morning Post.

58.com, a Chinese online classified advertisement site, agreed in June to be taken private by a consortium of investors led by Warburg Pincus and General Atlantic. The deal valued the company at US$8.7 billion.

This month, Sina Corporation, the operator of social media platform Weibo, said a company controlled by its chairman offered to take it private in a deal that would value it at US$2.7 billion. Sina had been listed in the US since 2000.

In January, a unit of Sohu agreed to take private US-listed Chinese online gaming company Changyou.com.

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