(This version of the Nov 9 story corrects name of Tencent gaming unit to Riot Games in paragraph 16)
SAN FRANCISCO/HONG KONG (Reuters) - Chinese gaming and social media company Tencent Holdings Ltd on Thursday flagged video games and ad sales as areas where it thinks it could help Snapchat owner Snap Inc after acquiring a 12 percent stake in the U.S. firm.
Snap disclosed in a U.S. regulatory filing on Wednesday that Tencent recently bought 145.8 million of its shares on the open market, fueling investor speculation about how the two companies might work together.
The U.S. social media company has struggled since its March initial public offering to meet analyst expectations for user growth, and it is locked in fierce competition for users and ad dollars with Facebook Inc.
In describing its stake, Tencent, the world’s largest gaming company by revenue, implied a close relationship with Snap that could go beyond passive investing and involve assisting the U.S. company with strategy.
Investors treated Tencent’s new stake as an investment rather than a step toward an acquisition, while analysts viewed the move as potentially more beneficial for the Chinese company than for Snap.
Shares in Snap fell 4.3 percent on Thursday to $12.35, adding to a 14.6 percent loss in the previous session. Snap went public at $17 a share.
Morgan Stanley analysts late on Wednesday cut their rating on the stock to “underweight” because of competition from Facebook’s Instagram, which has introduced features that mimic Snapchat’s disappearing messages. A separate Morgan Stanley division was lead underwriter for Snap’s IPO.
Tencent’s shares do not have voting power and the company will not have a board seat. Snap said in its filing on Wednesday that Tencent notified it of the share purchases this month.
“The investment enables Tencent to explore cooperation opportunities with the company on mobile games publishing and newsfeed as well as to share its financial returns from the growth of its businesses and monetization in the future,” Tencent said in an emailed statement. It also referred to the potential for newsfeed ads.
It was not immediately clear if Snap has the same plan.
The California-based company declined to comment beyond its filing, in which it said it was inspired by Tencent’s creativity and entrepreneurial spirit and grateful to continue a productive relationship.
Snapchat does not have a Facebook-style newsfeed, but said on Tuesday that it was planning a redesign that could include such a feature.
Last year, PepsiCo Inc’s Gatorade ran a interactive video game ad on Snapchat featuring tennis star Serena Williams. Beyond that and a few similar examples, the app has not offered mobile games.
Analysts said Tencent has benefited from its social media apps for the phenomenal popularity of its smartphone games such as Honour of Kings, and will need the help of local networks to fuel overseas growth.
Honour of Kings, based on Chinese historical characters, is the top-grossing mobile game in the world. It become so popular that Tencent in July curbed play time amid reports of addiction among children.
Tencent also owns Riot Games, developer of League of Legends, which is the most popular computer game in the United States and Europe according to research firm Newzoo.
Like other U.S. social networks, Snapchat is banned in China, although videos originating there are visible on the network presumably because of technological workarounds.
It is unlikely Snap “would ever be allowed to establish a foothold in China even if their relationship with Tencent were deeper,” Brian Wieser, senior analyst at Pivotal Research Group in New York said in a client note.
The companies operate on different scales. Tencent’s holdings include messaging apps QQ and WeChat, both ubiquitous in China, and its market capitalization of $469 billion is among the largest in the world. Snap’s is $15 billion.
“The China market is in some ways more advanced in social media and messaging than the U.S. is,” said Rebecca Fannin, founder of Silicon Dragon, a website about China and California’s Silicon Valley.
“Tencent might have teams come in and work with them,” Fannin said.
Tencent has global aspirations and may be buying shares with that strategy in mind, said Lindsay Conner, a Los Angeles lawyer who has represented Chinese companies in the United States.
“They often invest in companies to have a seat at the table, to understand businesses better, to see where the leading edge is between technology and content, and to have an insight into technology they should adopt or license,” he said.
Tencent first became an investor in Snap in 2013. The total size of its investment has not been disclosed.
Reporting by David Ingram in San Francisco and Sijia Jiang in Hong Kong; Additional reporting by Sheila Dang in New York; Editing by Peter Henderson and Meredith Mazzilli
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