(The following statement was released by the rating agency)
HONG KONG/SYDNEY, May 07 (Fitch) Fitch Ratings says Baidu,
A/Stable) USD370m acquisition of PPS Net TV (PPS) should
cost synergies and complement Baidu's own video platform iQiyi
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
significantly strengthens Baidu's video business.
Online video is a key strategic segment for Baidu, as user
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
against competitors Youku Tudou Inc., Sohu.com Inc. and Tencent.
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
applications, which should complement iQiyi's relative weakness
in PC and mobile
client software. Also, PPS has stronger market share in tier two
cities, whereas iQiyi fares better in tier one or two cities.
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
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.
the challenge to Baidu is to make the online video business a
Even with the PPS acquisition, Baidu's rating headroom remains
continues to expect Baidu to maintain financial flexibility,
profitability, ample liquidity and prudent leverage over the
medium term. The
company has generated free cash flow margins of over 40% for the
years. It had unrestricted cash of CNY8.7bn and short-term
its excess cash, of over CNY25bn at end-March 2013, compared
with total debt of
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