Image source: Baidu.
A controversial asset sale is now apparently off the table. Baidu (BIDU 0.36%) CEO Robin Li and iQiyi CEO Yu Gong have withdrawn their offer to acquire the fast growing but profitless iQiyi. Baidu is a majority stakeholder in the video-streaming site, and its 80.5% position would've translated into a roughly $2.25 billion payday given the original $2.8 billion price tag for all of it.
Li and Gong led a buying group that initially made the offer in February, and the market responded by sending the stock higher on the proposal. It's true that iQiyi was growing its revenue faster than Baidu's flagship search engine -- making it accretive to its top line -- but like most video portals it was proving tricky to monetize effectively. The sale of iQiyi would improve Baidu's profitability, and it would also pad Baidu's already beefy coffers.
The proposed transaction seemed to be taking a long time to play out, and we probably would've gotten an update on the proposal later this week. Baidu reports quarterly results after Thursday's market close. However, now it seems as if iQiyi will have to find either a new suitor or it will be up to Badiu to find a way to steer the popular hub toward profitability in plain sight.
The squeaky wheel
Things got interesting earlier this month when hedge fund operator and Baidu investor Acacia Partners wrote an open letter to Li, arguing that the deal was a conflict of interest brokered at an unfairly low price.
Acacia pointed to Youku Tudou, iQiyi's clearest rival, as a better measuring stick. Youku Tudou was snapped up in a buyout that was valued at $4.8 billion when it closed three months ago.
It's not clear if Acacia's activist stance a week ago resulted in cold feet for Li's group or if Baidu's boardroom was making it too difficult for the two parties to settle on terms for the transaction. We know the public-facing answer. Baidu's press release on Monday points out that the two sides failed to come to agree on the transaction structure and purchase price. However, the timing of the non-binding proposal's withdrawal -- days after Acacia's critical stance -- doesn't seem like a coincidence. Rather than face analysts questioning the deal during Thursday's earnings call, the deal is now moot.
Making it work
There's no denying that iQiyi is valuable, but investors will now have to be patient. There aren't many companies out there that can spend billions on a deficit-riddled Chinese video platform. One of the few potential buyers now has Youku Tudou, and one of the others just happens to be Baidu.
A quick exit would've provided It with a cash and earnings boost. Now it will be a waiting game. Acacia had suggested that Baidu can spin off its majority stake in iQiyi, but the IPO market for Chinese growth stocks has cooled lately. Baidu will have to make iQiyi work now, and the push to profitability won't be easy.
