VC Firms Gain Again With Alibaba’s Bid To Buy Youku Tudou
VC firms that stand to gain from Alibaba’s proposal to purchase the remaining 82% of Youku Tudou include Chengwei Capital, Youku’s first institutional investor in 2005 (alongside Farallon Capital Management) which has also participated in each of the five successive funding rounds leading up to the company’s 2010 IPO. Other VC firms that have a stake in Youku Tudou include GGV Capital, IDG Capital Partners, General Catalyst Partners and Sutter Hill Ventures.
Alibaba is offering $26.60 per share ─ a markup from the most recent closing share price of $20.43 ─ for the YouTube-like video platform. If approved, the all-cash deal would value Youku at $5.1 billion and transform it into a private subsidiary. In April 2014, Alibaba and its investment partner, Yunfeng Capital (a PE fund set up by Alibaba CEO Jack Ma), had together invested $1.2 billion in Youku, earning a 18.5% stake as part of a surge of investments ahead of Alibaba’s September IPO.
Alibaba is making the proposal with the support of Victor Koo, Youku’s founder and biggest shareholder, who would continue to serve as CEO.
The proposed acquisition represents a huge bet on Internet video, a growing trend in China that saw the e-commerce market reach more than 461 million users as of June with projected $5.8 billion revenues this year.
The bid supports Alibaba’s move to diversify from e-commerce through a digital entertainment content as China’s economic growth slows and Alibaba’s shares have dropped below their $68 IPO price. Alibaba is also looking to Youku as a way to learn more about users and better tailor content and ads to them.
Youku, with its large user base and high-quality video content, much of which is licensed programming, supplements Alibaba’s existing portfolio.
It’s been a roller coaster series of transactions for Youku Tudou, the result of a 2012 merger between two leading sites, Youku and Tudou, that together had previously received more than $300 million in PE and VC funding. Their merger was driven in large part by a need to rein in rising costs for bandwidth and content and bulk up market share, then at 35% of the online video market.
Despite year-on-year revenue growth, the business has yet to turn a profit. With Alibaba as a parent, Youku would save on costs and leverage Alibaba’s e-commerce, media and advertising platforms to accelerate growth in a hotly popular but competitive market that is quickly shifting to mobile.
The highly competitive online video market has been undergoing consolidation. Two years ago, Baidu paid $370 million for the online video business of PPS. The search giant then combined PPS with iQiyi, an online TV and movie portal it had acquired in 2012. In addition to iQiyi and market leader Youku, other major players include Tencent’s video site, Sohu Video and LeTV.
