Ctrip to Sina raise record war chest on big 3-deal spree

Staff Writer
Columbus CEO

(c) 2013, Bloomberg News.

HONG KONG — Chinese Internet giants Alibaba Group Holding, Baidu and Tencent Holdings have spent a record $7.4 billion on acquisitions this year. Now their smaller listed peers are raising capital faster than ever to join the technology deal rush.

The financing weapons of choice for the nation's mid-sized Internet companies are convertible bonds. Companies from travel agent International Ltd. to web portal Sina Corp. sold $3 billion of the securities this year, more than in all previous years combined, data compiled by Bloomberg show.

The combination of near record-low interest rates and soaring stock valuations has made convertible bonds an attractive funding option for Chinese Internet companies. The offerings come as they compete for deals with Alibaba, Baidu and Tencent, who have been buying everything from mobile game developers to video sites.

"They're raising war chests" to make acquisitions, said John Hall, who runs technology, media and telecoms investment banking in Asia for JPMorgan Chase & Co. "A convertible bond allows the issuer to take advantage of the strong market conditions to raise capital quickly."

Convertible bonds sold by the companies this year won't convert into stock unless the shares rise an average 37 percent within five years, data compiled by Bloomberg show, so they carry limited immediate risk of dilution. They also offer lower interest costs than traditional bonds, with Sina paying 1 percent on its $800 million of five-year convertible bonds issued in November, compared with the 3.25 percent larger Baidu pays on five-year bonds it sold in July.

Shares of Chinese Internet companies listed overseas have more than doubled this year and now trade at an average 62 times earnings when adjusted by market value, data compiled by Bloomberg show. Valuations are being driven by growth in mobile Internet usage among China's population, according to JPMorgan's Hall.

"If you do not want to be forced into joining one of the larger groups, you need the money to support you to be independent," said Jason Lam, head of equity capital markets at technology-focused boutique investment bank China Renaissance.

The latest companies to take advantage of the convertible wave are online real-estate portals E-House China Holdings Ltd. and SouFun Holdings Ltd., which raised a combined $485 million earlier this month that they said could help fund acquisitions.

Sina is "very actively looking" for acquisitions to help sustain its business growth, including in mobile Internet and new media, and has recently become "more focused" on the deal search, Chief Executive Officer Charles Chao said on a Nov. 12 call with analysts.

Chinese Internet companies will seek to branch into search, mobile game distribution, e-commerce and online video through acquisitions, according to Citigroup Inc. Alibaba, China's largest e-commerce operator, agreed in May to buy a $294 million stake in online-mapping provider AutoNavi Holdings Ltd. and invested $500 million in app developer UC Mobile Ltd.

The next acquisition targets in the industry may include Forgame Holdings Ltd., maker of web adventure games "Soul Guardian" and "Charmed Westward Journey," and online retailer E-Commerce China Dangdang Inc., according to Ricky Lai, an analyst at Guotai Junan International Holdings Ltd. Boyaa Interactive International Ltd. and IGG Inc., game developers that both started trading in Hong Kong this year, are also attractive, Lai said by phone.

Dangdang welcomes strategic investors, though it isn't for sale, Chief Executive Officer Li Guoqing wrote in a post Wednesday on the Twitter-like Weibo microblogging service run by Sina. A spokeswoman for Forgame declined to comment. Spokesmen for Dangdang, Boyaa and IGG didn't immediately respond to messages seeking comment.

The intensity of Internet deal-making was evident when Qihoo 360 Technology Co., China's second-largest search engine, tried to acquire smaller rival Sogou Inc. after raising $600 million from a convertible bond sale this year. Qihoo was outbid by Tencent, Asia's largest Internet company by sales, which bought a stake in Sogou in September.

"The price of acquisitions in China's Internet industry has risen to a ridiculous level," Qihoo Chairman Zhou Hongyi told analysts last month. "China's Internet giants have been spending huge amounts of money on acquisitions."

Still, Qihoo "won't hesitate" to use its cash and stock to compete effectively in deals, Zhou said.

Spokesmen for Qihoo, Sina, Ctrip and E-House declined to comment or didn't immediately respond to requests for comment. SouFun investor relations manager Yiwen Zhang said the company may consider acquisitions in the future related to its core business and doesn't have immediate plans for deals.

Baidu's acquisition of unprofitable 91 Wireless Websoft Ltd. for $1.85 billion in July, its largest-ever purchase, was among the most expensive deals this year. The deal valued the app store operator at 16.2 times estimated sales, more than six times the average of similar listed companies and 16 times its valuation the previous year, according to Bloomberg Industries.

"If you don't have the balance sheet, you'll soon realize the big three are getting further away," said China Renaissance's Lam.