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Tencent to Buy Rest Of Sogou Search Unit -- WSJ

07/29/2020 | 02:48am EST

Acquisition of affiliate would mark latest exit by a Chinese tech firm from U.S. stock listing

By Joanne Chiu 

Tencent Holdings Ltd. proposed to buy out other investors in its search-engine affiliate Sogou Inc. for about $2.1 billion, in what could become the latest instance of a Chinese technology company abandoning the U.S. stock market.

The proposal adds to a flurry of deal-making in recent months involving New York-listed Chinese internet firms. Buyout offers have emerged for several smaller groups, while three larger companies, including Alibaba Group Holding Ltd., have secured secondary listings in Hong Kong.

Analysts and investors say secondary listings or buyouts can both offer a path to higher valuations, and might be a way to shield companies from rising U.S.-China tensions. For companies accepting a buyout offer, a higher valuation would come via a later initial public offering in Hong Kong or in mainland China. Tencent's proposal to Sogou made no mention of any plan to relist.

Sogou, a rival to the larger Baidu Inc., went public on the New York Stock Exchange in late 2017, in a spinoff from portal operator Sohu Inc. However, since then Sogou's stock has mostly languished below its debut price.

Sogou, known as "Search Dog" in Chinese, said Monday that Tencent had offered to pay $9 in cash for each American depositary receipt that it doesn't already own. Hong Kong-listed Tencent owns 39% of Sogou and holds 52% of its voting rights. Analysts at Nomura said in total Tencent would pay about $2.1 billion.

Ronald Wan, chief executive at financial company Partners Capital International, said Tencent could enjoy capital gains by relisting Sogou at a later date.

Jialong Shi, China internet analyst at Nomura, said Sogou would be a good purchase for Tencent, and its social app WeChat could benefit from Sogou's search know-how. "Sogou can help Tencent make inroads into the already competitive search-advertising market in China," he said.

The bid is at a 57% premium to Friday's closing price, but far below Sogou's $13-a-share IPO price. Sogou's depositary receipts leapt 48% Monday to $8.51.

Sogou said its independent directors would review the proposal, which it said was preliminary and nonbinding. Sohu, which still owns a 34% stake, said its board hadn't yet been able to review the proposal in detail. Charles Zhang, Sohu's founder, has agreed to sell his 6.4% stake in Sogou to Tencent.

This year has brought a wave of takeover bids for U.S.-listed Chinese tech groups, echoing an earlier surge of deals starting five years ago.

In April, Sohu took its online gaming unit Changyou.com private. In June, 58.com Inc., which operates China's largest marketplace for online classified advertisements, said a consortium led by Warburg Pincus Asia planned a $8.7 billion buyout, supported by 58.com's founder Jinbo Yao. This month, Nasdaq-listed Chinese news and social-media company Sina Corp. received a $2.7 billion management buyout offer.

Mr. Shi at Nomura said a secondary listing isn't viable for smaller companies trading at low valuations. "The alternative plan for those companies is to go private and then relist themselves in China's A-share market or Hong Kong when time permits," he said. The A-share market refers to mainland stock markets in Shanghai and Shenzhen.

He said the upshot could be higher valuations. "Asian investors are generally more appreciative of the business models of these Chinese tech companies, as well as having a better understanding of the unique industry environment in which these companies operate," he said.

Mr. Wan at Partners Capital said while Chinese companies incorporated outside China and with unequal voting rights aren't eligible for a domestic listing, they now have ways to raise funds onshore or in Hong Kong.

"There is an urgency for U.S.-listed Chinese companies to explore other viable options if the U.S.-China tensions escalate," he said.

Write to Joanne Chiu at joanne.chiu@wsj.com

 

Stocks mentioned in the article
ChangeLast1st jan.
ALIBABA GROUP HOLDING LIMITED -3.10% 127.53 Delayed Quote.-45.20%
BAIDU, INC. -0.30% 149.84 Delayed Quote.-30.71%
NASDAQ COMP. -1.55% 15537.690666 Real-time Quote.22.46%
NOMURA CO., LTD. -0.59% 1003 End-of-day quote.17.72%
SOGOU INC. 0.11% 8.95 End-of-day quote.9.82%
TENCENT HOLDINGS LIMITED -0.65% 459.4 End-of-day quote.-18.55%
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Financials
Sales 2021 569 B 89 375 M 89 375 M
Net income 2021 159 B 24 938 M 24 938 M
Net cash 2021 138 B 21 710 M 21 710 M
P/E ratio 2021 23,0x
Yield 2021 0,45%
Capitalization 3 574 B 562 B 562 B
EV / Sales 2021 6,04x
EV / Sales 2022 5,03x
Nbr of Employees 107 348
Free-Float 62,3%
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Mean consensus BUY
Number of Analysts 49
Last Close Price 374,97 CNY
Average target price 511,96 CNY
Spread / Average Target 36,5%
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Managers and Directors
Hua Teng Ma Executive Chairman & Chief Executive Officer
Chi Ping Lau President & Executive Director
Shek Hon Lo Chief Financial Officer & Senior Vice President
Chen Ye Xu Chief Information Officer
Yu Xin Ren COO & President-Interactive Entertainment Group
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