Baidu Plans U.S. IPO of China's Top Netflix-Style Service

(Bloomberg) -- Baidu Inc. plans to list its Netflix-like video streaming service iQiyi on a U.S. exchange, as China's biggest search engine posted fourth-quarter sales that topped analyst estimates.

Baidu submitted draft registration documents to the Securities and Exchange Commission although the proposed number of American depositary shares in the initial public offering hasn't been determined, the company said in a statement. The Beijing-based company expects to remain the controlling shareholder after the IPO of the business, which analysts have valued at about $15 billion.

A listing will give iQiyi much-needed financial power as Baidu faces off against Tencent Holdings Ltd. and Alibaba Group Holding Ltd. in a hugely expensive streaming video market. Content costs soared to $2.06 billion in 2017 and Chief Financial Officer Herman Yu warned they would likely climb at the same pace in 2018, suggesting a rise to almost $4 billion. While costly, video is vital to keeping users hooked and generating ad sales.

“The iQiyi IPO confirmation is positive and we think that video will be a top story in 2018,” New Street Research analyst Kirk Boodry said. “If Baidu gets 15 percent of the valuation as proceeds of the listing then you're talking about $1.5 billion to $2 billion and their content costs are probably in that range now, so it gives them a couple of years of funding.”

Baidu's fourth quarter revenue hit 23.6 billion yuan ($3.62 billion) in the three months ended December, helped by its newsfeed product and search advertising. That compares with the 23.1 billion yuan average of analyst estimates. Baidu's U.S. shares gained more than 5 percent in extended trading after the results were released. Net income attributable to Baidu was 4.2 billion yuan, compared with the 3.97 billion yuan that analysts predicted.

The news feed product, which competes with market leader Jinri Toutiao, uses artificial intelligence to decide what content users want to read and has rapidly become a major source of ad revenue. Its continued success combined with Baidu's cost-cutting in areas like food delivery have helped rebuild shareholder confidence after its search business was battered by controversy in 2016.

The long-mooted move to list iQiyi is one way the company can shed costly business units to focus on what it sees as its core strength: products driven by artificial intelligence. It sold control of its unprofitable food delivery business and merged its travel operations into Ctrip.com International Ltd. But unlike many of Baidu's other side businesses, data from QuestMobile and Jefferies show that iQiyi is a market leader, making up 33 percent of China's online video market when broken down by monthly time spent in December.

Leadership comes with a cost. Baidu spent 82 percent more on content in 2017 than the $1.13 billion it shelled out the previous year. In yuan terms, that rise is slightly more moderate at about 70 percent, based on previous filings. But Yu warned that margins could decline this year as it spends more to market its apps.

“It's not profitable yet but we lost a lot less than the competition,” Baidu Chief Executive Officer Robin Li told investors on the earnings call. 

A 2016 attempt by Li to buy iQiyi valued the company at $2.8 billion. That plan failed to get board approval after some shareholders protested the value on the offer. Since then, valuations of the streaming video company have sky-rocketed; both Jefferies and CICC Research value the business at about $15 billion.

To contact Bloomberg News staff for this story: David Ramli in Beijing at dramli1@bloomberg.net.

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan

©2018 Bloomberg L.P.

With assistance from David Ramli