China to clear Tencent’s $3.5 billion Sogou deal

(Reuters) – China’s antitrust regulator is ready to clear tech giant Tencent Holdings Ltd’s plan to take the country’s no.3 search engine Sogou private, three people with knowledge of the matter told Reuters, a move that signals the watchdog is willing to wave some deals through even as it ratchets up sector scrutiny.

The regulator, State Administration of Market Regulation (SAMR), has no objection to the $3.5 billion deal for the 60% of U.S.-listed Sogou that Tencent doesn’t already own, the people said, as long as Tencent is willing to set up a special mechanism to ensure data security – a first for SAMR deal approvals.

Tencent must also pay a comparatively small fine – 500,000 yuan ($76,000) – for not reporting deals properly for antitrust reviews, two of the people said, in line with past cases for similar violations.

The move highlights Chinese regulators are still looking to approve merger and acquisition deals in the tech sector, but now with strict conditions after years of a laissez-faire approach. The green light for the closely watched deal will come as a relief for China’s tech sector, reeling from Beijing’s antimonopoly crackdown on home-grown internet giants that culminated weeks after the shelving of fintech firm Ant Group’s $37 billion IPO in November.

“What SAMR wants is enforcement … it is not in their interest to kill or actively block a deal,” said one of the people. “They are fine with companies’ actual market-leading status as long as it doesn’t prevent new entry into the market.”

The people with knowledge of the matter declined to be identified due to the sensitivity of the matter.

Sogou trails only Baidu and Qihoo 360 in China’s enormous internet search market, according to analytics firm SpeedTest, and is the sole search engine on Tencent’s all-in-one mobile app WeChat, a must-have in everyday life in China. Tencent, China’s biggest video game and social media company, first announced plans to take it private last September.

Tencent and SAMR did not immediately respond to requests for comments when contacted by Reuters.

Sogou declined to comment.

DATA CONCERN

One of the areas of heightened scrutiny has been M&A deals in the sector in the recent past, with the regulators taking a dim view of the violation of antitrust rules and, in some cases, data privacy laws.

The linchpin of the deal approval conditions is meeting the regulator’s requirement on data security – defining who can have what kind of access to the bulk of users’ data and personal information, and how to use that, said the three people.

A merger of China’s two leading video games streaming sites – Huya and Douyu, both backed by Tencent – is also under review and will need to satisfy similar requirements on data security, said the sources.

Reuters reported last month that Tencent was having to offer concessions to get approval for its plan to merge the two sites, including giving up exclusivity on some of its content rights.

After the merger, Huya and Douyu will need to set up a firewall in-between and cannot share user data and information to each other, two of the people said.

SAMR would also approve the merger soon after a final touch on the concessions are made, they said.

($1 = 6.5468 Chinese yuan renminbi)

Reporting by Pei Li and Julie Zhu; Editing by Sumeet Chatterjee and Kenneth Maxwell

Prosus nets $14.6 billion from sale of Tencent stake

AMSTERDAM (Reuters) – Amsterdam-based technology investor Prosus NV has netted $14.6 billion from the sale of a 2% stake in Tencent Holdings Ltd, the Chinese gaming and social media giant said, in one of the world’s largest ever block trades.

“Our belief in Tencent and its management team is steadfast, but we also need to fund continued growth in our core business lines and emerging sectors,” Prosus Chairman Koos Bekker said in a statement after the completion of the deal on Thursday.

In a Hong Kong Stock Exchange filing, Tencent said Prosus sold 191.89 million shares for HK$114.1 billion, reducing its stake to 28.9%.

That works out at HK$595 ($76.44) per share, at the top of an indicative range of HK$575 to $HK595 set out when Prosus announced its intention to sell the stake in an accelerated offering on Wednesday afternoon.

The price was a 5.5% discount to Tencent’s Wednesday close of $HK629.50. Tencent stock, which is up 10% so far this year, opened down 2.5% in Hong Kong on Thursday following the news.

The block trade – a trade of a large number of securities – was the largest of Tencent stock since 2018 when Naspers sold 2% of the group for $9.8 billion, Refinitiv data showed.

Prosus also invests in online food delivery platforms, classified marketplaces and digital payments businesses.

For the half-year ended Sept. 30, it reported a 29% increase in core earnings to $2.2 billion, as proceeds from its Tencent stake offset losses at other online interests.

Citigroup Inc, Morgan Stanley and Goldman Sachs Group Inc were joint global coordinators for the sale.

($1 = 0.8425 euros)

($1 = 7.7849 Hong Kong dollars)

Tencent’s Timi gaming studio generated $10 billion in 2020 – Sources

(Reuters) – Chinese tech giant Tencent’s Timi Studios, maker of popular video games Honor of Kings and Call of Duty Mobile, generated revenue of $10 billion last year, two people with direct knowledge of the matter told Reuters.

The $10 billion would make Timi the world’s largest developer, the sources say, which many industry watchers had suspected to be the case.

It also provides a hefty basis for its ambitions to move beyond mobile games and compete directly with global heavyweights developing expensive “AAA” titles on platforms such as desktop computers, Sony’s PlayStation, Nintendo’s Switch and Microsoft’s Xbox.

In a recruitment notice last month, a Timi engineer wrote that the company aims to create a new AAA game that resembles the virtual community from the movie Ready Player One, and will “compete head-to-head against big powers from Japan, Korea, Europe and U.S.”

Tencent is building studios overseas, including one for Timi and one for Lightspeed and Quantum, both in Los Angeles, with the goal of creating content with original intellectual property that has global appeal.

Tencent aims eventually to derive half its game revenue from overseas, from 23 percent in the fourth quarter of 2019, the most recently available figure.

Many major studios are turning to Tencent for support to convert their “hardcore” desktop or console games to mobile. Such games feature long sessions and in-depth storytelling or battles, with some including multiplayer online role-playing or online battle arenas.

Last week, Tencent reported 156.1 billion yuan ($23.79 billion) in overall online game revenues for 2020 but did not break down revenue for individual studios, which are run independently and compete with each other.

Timi’s proceeds accounted for 40% of the game revenue, said the two people.

Of Tencent’s remaining gaming revenue last year, its Lightspeed and Quantum studio, the developer of PUBG Mobile, another top-grossing game, contributed 29%, the people said, while 26% was proceeds from publishing for other developers. Aurora Studios Group, boosted by its Moonlight Blade Mobile title, contributed 3%, the people said.

The sources declined to be identified because the information is not public.

Tencent did not immediately reply to a Reuters request for comment.

Tencent, which has benefited from a surge in paying gamers, said last week its online games revenue rose 29% to 39.1 billion yuan in the fourth quarter.

($1 = 6.5619 Chinese yuan renminbi)

Tencent-backed Waterdrop to halt mutual aid service – Chinese scrutiny

BEIJING (Reuters) – Tencent-backed Waterdrop said on Friday it would shut down its online healthcare mutual aid programme at the end of March amid China’s tightening of financial technology regulations.

Waterdrop’s mutual aid programme, which provides users with a basic health plan covering various types of critical illnesses and participants share the risk of becoming ill and bearing the medical cost, has served 80 million users, mostly in smaller cities in China, it said in a statement.

One of the leading providers in the mutual aid industry, besides Waterdrop, is Ant Group’s [688688.SS] Xiang Hu Bao, which was launched in 2018 on Alipay and has since accumulated hundreds of millions of users. Others include ride-hailing giant Didi Chuxing.

Chinese food delivery giant Meituan shut down its online mutual aid service in January.

China’s Banking and Insurance Regulatory Commission (CBIRC) has said since late last year that all financial activities needed to be overseen by regulators and all businesses needed to be licensed to operate. Mutual aid platforms are not licensed by the CBIRC.

Waterdrop, that counts Tencent, reinsurer Swiss Re, Boyu Capital and Meituan as investors, was valued at about $2 billion in a funding round last August. It has been planning a U.S. IPO to raise about $500 million, IFR has reported.

Founded in 2016, Beijing-headquartered Waterdrop runs three core businesses – Waterdrop Insurance Mall, Waterdrop Mutual and Waterdrop Crowdfunding.

Tencent’s quarterly profit jumps 175%, above forecast

(Reuters) – Chinese gaming and social media giant Tencent Holdings Ltd on Wednesday reported a forecast-beating 175% rise in quarterly profit.

The world’s largest gaming firm by revenue booked profit of 59.3 billion yuan ($9.09 billion) for the three months through December. That was ahead of an average analyst estimate of 30.65 billion yuan, based on data from Refinitiv.

($1 = 6.5232 Chinese yuan renminbi)

China regulators held talks with Alibaba, Tencent, nine others on ‘deepfake’ tech

Chinese regulators recently summoned 11 domestic technology companies including Alibaba Group, Tencent and ByteDance for talks on use of ‘deepfake’ technologies on their content platforms, stepping up scrutiny of the sector.

China’s cyberspace administrator said in a statement on Thursday that it and the public security ministry met with the companies to talk about potential problems with deepfake technologies. Kuaishou Technology and Xiaomi Corp also attended the meeting, it said.

All the companies did not immediately respond to requests for comment.

Deepfakes use artificial intelligence to create hyper-realistic but fake videos or audios where a person appears to say or do something they did not.

China has increased scrutiny of its internet giants in recent months, citing concerns over monopolistic behaviour and potential infringement of consumer rights.

Regulators also told the companies to “conduct security assessments on their own” and submit reports to the government when they plan to add new functions or new information services that “have the ability to mobilize society”, the statement said.