Fitch: Significant Synergies In Baidu's Acquisition of PPS

Tue May 7, 2013 10:02pm EDT

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(The following statement was released by the rating agency) HONG KONG/SYDNEY, May 07 (Fitch) Fitch Ratings says Baidu, Inc's. (Baidu, A/Stable) USD370m acquisition of PPS Net TV (PPS) should generate significant cost synergies and complement Baidu's own video platform iQiyi in terms of user profile, market coverage, content resources and mobile presence. The combined entity will become China's largest online video platform by number of mobile users and video viewing time. Fitch believes the acquisition significantly strengthens Baidu's video business. Online video is a key strategic segment for Baidu, as user numbers and time-spend continue to grow, underpinning revenue growth potential. According to iResearch, China's online video market will reach CNY33.2bn in 2016, up from CNY9.3bn in 2012. The acquisition should strengthen Baidu's market position in online video against competitors Youku Tudou Inc., Sohu.com Inc. and Tencent. The Chinese online video market has been chasing consolidation since the merger of the former two biggest operators, Youku and Tudou, in 2012. PPS is the leading peer-to-peer video streaming platform in China and also ranks number one in its category by desktop client installations and mobile applications, which should complement iQiyi's relative weakness in PC and mobile client software. Also, PPS has stronger market share in tier two or three cities, whereas iQiyi fares better in tier one or two cities. Further, PPS's user-generated content model should direct traffic to iQiyi. As with the Youku Tudou merger, Fitch expects integration of iQiyi's and PPS's content delivery networks to reduce their combined unit bandwidth cost and also lead to personnel cost savings. Given that fixed costs are high in the online video business, cost savings will benefit cash from operations. However, Fitch points to execution risks in integrating PPS's content, resources, advertising and client platforms with Baidu's. In addition, Baidu may also need to clean up any pirated content on PPS's site, which may make PPS's applications potentially less appealing to its current users. More importantly, the challenge to Baidu is to make the online video business a profitable business model. Even with the PPS acquisition, Baidu's rating headroom remains high. Fitch continues to expect Baidu to maintain financial flexibility, with strong profitability, ample liquidity and prudent leverage over the medium term. The company has generated free cash flow margins of over 40% for the last four years. It had unrestricted cash of CNY8.7bn and short-term investments, parking its excess cash, of over CNY25bn at end-March 2013, compared with total debt of CNY11.9bn. Contacts: Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Steve Durose Senior Director Head of APAC TMT Ratings +61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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