Joy's sale of its China business to Baidu collapses

The livestreaming company may be forced to find a new buyer for its Chinese business at a far lower price after its sale to Baidu announced in 2020 failed to get regulatory approval

Key Takeaways:

  • Joyy’s $3.6 billion sale of its China livestreaming business to Baidu has collapsed, more than three years after the deal was first announced
  • Joyy stopped including the China livestreaming business in its financial results as early as 2021, and was recasting itself as a Singapore-based livestreaming company


By Doug Young

It wasn’t a very happy New Year for Joyy Inc. (YY.US), which kicked off 2024 by announcing the collapse of its 3-year-old deal to sell its China-based livestreaming business to Baidu (BIDU.US; 9888.HK) for $3.6 billion.

The deal looked like a winner for Joyy when it was announced back in 2020, allowing the company to offload a business in China’s sensitive livestreaming sector that has become a hotbed for regulatory crackdowns. In addition to the big price tag, the sale would have transformed Joyy to a Singaporean company whose main business was its similar Bigo livestreaming business, which was out of the grasp of Chinese regulators with its focus on Southeast Asia, Europe and the Middle East.

The company stopped including financials for its China operations as early 2021, considering them a non-continuing operation, and said in its latest statement issued on Monday that deal was “substantially competed” in February 2021.” Joyy was even reportedly preparing to privatize its stock from New York after the deal closed, most likely in preparation for a later re-listing, perhaps in Singapore in its new form as a Singaporean company.

But now all those bets are off, which raises the bigger question of what’s next for this company. It also once again shines a spotlight on the big regulatory risks of doing business in China, since the deal appears to have collapsed after failing to get approval from China’s anti-trust regulator.

Investors were understandably upset by the deal’s collapse, with Joyy’s stock falling 17% in the two trading days after the announcement. That selloff left the shares trading at a forward price-to-earnings (P/E) ratio of just 8, which is based on the profits for Joyy’s non-China business. That trails the forward P/E of 16 for Kuaishou (1024.HK), though it’s ahead of the 5 for dating app Hello Inc. (MOMO.US), which also derives a big part of its revenue from its livestreaming service.

Truth be told, the low P/E ratio looks justified by the relatively weak performance for Joyy’s non-China business, whose revenue fell 3.3% year-on-year to $567.1 million in last year’s third quarter, and is down 13% over the last two years. But the Chinese business looks like the more worrisome element for the company right now. That’s because Joyy doesn’t even count that business in its latest financials and may have to restate all of its results for the last three years if it can’t quickly dispose of the business through a revived Baidu deal or sale to another buyer.

No cause was given by either Baidu or Joyy in their separate statements on the matter. But Baidu said in its statement that it exercised its option to terminate the deal because closing conditions “had not been fully satisfied” by a deadline of Dec. 31 last year. It wasn’t more explicit, though in the same statement it said the closing of the deal was subject to “obtaining necessary regulatory approvals,” implying the two sides failed to get approval from China’s market regulator.

Early trouble signs

The deal’s collapse doesn’t come as a complete surprise, since Reuters had reported as early as September 2021, or about a year after the original deal was announced, that the regulator was unlikely to give its approval. No direct reason was given in the Reuters report, but at the time the regulator had already embarked on a campaign to curb excessive power that was becoming concentrated in a handful of China’s largest internet companies.

Around that same time, the State Administration for Market Regulation (SAMR) officially vetoed a deal that would have created China’s biggest livestream gaming company through the merger of Douyu (DOYU.US) and Huya (HUYA.US). In the case of Joyy and Baidu, the regulator never actually announced such a veto, but simply failed to give its approval.

SAMR has used such “passive vetoes” recently on a couple of high-profile global chip mergers, most recently killing the planned purchase of Israeli chip firm Tower Semiconductor by U.S. giant Intel last year. But this is one of the first recent cases we know of where such lack of regulatory action was also used in a purely Chinese deal.

The regulator may use such an approach in cases where it’s more difficult to show that a deal is truly anti-competitive, since Baidu’s main businesses are in search and artificial intelligence, which aren’t really related to livestreaming. Such an approach also doesn’t require the regulator to give any reason for its action, since it never officially vetoed the deal, underscoring the unusual nature of regulatory risk in China compared with other countries.

Investors never seemed too impressed with the deal from the start. Baidu’s purchase valued the China livestreaming business at $3.6 billion, and yet Joyy’s overall market value hasn’t been anywhere near that level for quite some time. After the latest selloff, the company has a market value of just $2 billion, which should presumably include both the Chinese operations as well as the Singapore-based Bigo livestreaming business that was meant to become its new main operation.

While Joyy’s overall revenue fell year-on-year in the third quarter, we should point out that Bigo’s revenue rose 2.2% year-on-year for the period, representing its first gain in six quarters. At $494.1 million in the latest quarter, Bigo is Joyy’s biggest breadwinner, excluding the China business, accounting for 87% of the company’s total in the third quarter. Still, 2.2% revenue growth isn’t anything to get too excited about, especially for an internet company.

Joyy said in its statement that it is “is seeking legal advice and will consider all options at its disposal,” suggesting it believes it could still revive the deal and force Baidu to find a way to complete the transaction. But it may not have many legal options, since regulatory approval in China is obviously necessary for this deal to move forward.

The bottom line is that Joyy may need to scramble to find a new buyer for its China business. It’s unlikely to find any interested parties outside China, and most big Chinese internet companies with the necessary resources are unlikely to show any interest after what happened with Baidu. That means Joyy could ultimately be forced to settle for a sale to a smaller company, most likely at a far lower price than what it was set to get from Baidu.

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