What happened

Shares of Huya (HUYA -3.18%) have fallen today, down by 8% as of 1:20 p.m. EDT, after JOYY (YY -1.38%) announced a share transfer to Tencent (TCEHY -2.04%). Tencent also sent Huya a non-binding proposal letter advocating for a merger.

So what

JOYY has sold 30 million Huya shares to Tencent for $810 million in cash, further boosting Tencent's stake in the leading video game live-streaming platform in China. The Chinese tech giant, which is already the largest gaming publisher in the Middle Kingdom, had recently secured control of Huya in a previous purchase of Huya shares from JOYY. In addition to buying shares from JOYY, Tencent has entered into a separate agreement to buy 1 million Huya shares from Huya CEO Rongjie Dong.

Young woman in a dark room wearing headset at a gaming computer with a multicolor keyboard

Image source: Getty Images.

Tencent is now pushing for Huya to merge with fellow live-streaming specialist DouYu (DOYU -1.86%), which also reported second-quarter results this morning. DouYu now has over 165 million monthly active users (MAUs) and posted a 34% jump in revenue to $354.4 million last quarter.

Now what

Tencent also holds a 38% stake in DouYu and is proposing an all-stock merger that would entail Huya acquiring all outstanding DouYu shares. Both Huya and DouYu warn that no deal has been finalized and there is no assurance that such a transaction will occur. The proposal does not specify an exchange ratio, which would need to be negotiated by all relevant parties. Since the proposed merger would be an all-stock deal, no additional financing would be needed.

"We are writing today to propose that you consider a strategic combination of Huya and DouYu, which we believe represents a compelling value creation opportunity for both companies," Tencent wrote in the letter.