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Why Huya Stock Fell Today

By Evan Niu, CFA – Aug 10, 2020 at 2:25PM

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Tencent is securing even greater control of Huya and pushing for a merger.

What happened

Shares of Huya (HUYA -2.20%) have fallen today, down by 8% as of 1:20 p.m. EDT, after JOYY (YY -3.75%) announced a share transfer to Tencent (TCEHY -0.10%). 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 -3.55%), 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.

Evan Niu, CFA owns shares of Tencent Holdings. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool recommends HUYA Inc. The Motley Fool has a disclosure policy.

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