Alibaba's Expensive Plans to Get Bigger in Video

Alibaba Chief Executive Daniel Zhang said Youku’s “high-quality video content will be a core component of Alibaba’s digital product offering in the future.” ENLARGE
Alibaba Chief Executive Daniel Zhang said Youku’s “high-quality video content will be a core component of Alibaba’s digital product offering in the future.” Photo: Reuters

Alibaba is treating Youku Tudou YOKU 21.93 % to a movie, but its own investors might not like the show.

Chinese e-commerce giant Alibaba said Friday it has offered to buy the shares it doesn’t already own in online video company Youku Tudou for around $ 4.2 billion, not including Youku’s net cash. This represents a 30% premium to Youku’s share price before the deal was announced.

The offer should be of relief to long-suffering Youku Tudou investors, who have seen the company’s shares languish over the past five years, even as online video in China has taken off. Youku, which relies mostly on selling advertisements with its videos, hasn’t had a profitable quarter since at least 2009, and has accumulated $ 500 million in losses in that time.

Making money in online video is simply a tough nut to crack. Google’s advertising-reliant YouTube service is widely used but hasn’t contributed profit to the company. Netflix NFLX -2.08 % has had luck with selling content, but it has an army of competitors breathing down its neck. And in China, consumers simply aren’t accustomed to paying for content.

Alibaba’s bet may be that part of that is changing. Youku has gained traction in getting Chinese to pay through a video subscription service. Revenue from subscribers to its paid video service, a unit that also includes its games division, rose to $ 28.1 million in the June quarter, from almost nothing a year earlier. But that is still just 11% of total revenue.

Gaining complete control of Youku’s 500 million-plus monthly unique visitors also helps justify Alibaba’s investments in original content through subsidiary Alibaba Pictures, a Hong Kong studio it acquired in 2014. In addition it helps it stay relevant with archrival Tencent, which may have a more natural vehicle for video through WeChat, TCEHY 0.88 % its ubiquitous messaging and social media service.

With no Youku profits, technology investors will probably measure the deal as a multiple of sales. The offer’s enterprise value, adjusting for net cash, is 3.2 times 2016 sales, according to S&P Capital IQ’s estimates. That may be cheaper than Netflix’s 4.9 times forward sales, but Netflix is profitable. And it isn’t cheap compared with Chinese web portal Sina’s 1.8 times, or the 3.8 times at search-engine giant Baidu, both of which are profitable.

However, the price on offer, at $ 26.60 a share, is cheaper than the $ 30.50 Alibaba paid in 2014 for the 18% stake in Youku that it currently owns. Investors could view that as a smart doubling down. Or it is a sign the original deal hasn’t really panned out.

Alibaba should hope the Youku sequel is better than the original.

Write to Alex Frangos at [email protected] Markets

About The Author