Chinese streaming platform iQIYI is returning to the U.S. financial markets for a twin-pronged capital injection. On Tuesday it unveiled plans to raise $800-900 million from the sale of debt instruments, and a similar sum from the sale of new shares.
The moves come as the company makes public play of expansionary developments in Southeast Asia, including the opening of a regional office in Singapore which it says will eventually have 200 staff. The prospectus that accompanies the twin capital raising exercises, points instead to the business still being substantially based in mainland China. It says that the proceeds will be used to “expand and enhance content offerings, strengthen its technologies, and for working capital and other general corporate purposes.”
The prospectus says that the company will issue 40-46 million new ADR shares depending on the strength of investor demand. On the NASDAQ market, iQIYI ADRs closed at $22.31 apiece on Tuesday, but fell by 8% to $20.49 after hours, following the dilutive news. The new shares represent a 14-16% expansion of iQIYI’s capital. The issue of notes convertible into equity by 2026 is the third time in two years that iQIYI has tapped the debt market, after previous convertible note sales in December 2018 and March 2019.
The preliminary prospectuses do not indicate the price of the new ADRs, nor the rate at which the notes can be converted into ADRs. If 40 million new ADR shares were to be sold at current market price, the company would raise $820 million, before expenses.
That, it turns out, is roughly equivalent to iQIYI’s losses so far in 2020. The regulatory filings show that the company lost a net $809 million in the nine months between January and the end of September this year. It also lost subscribers this year, with numbers down from 106.6 million at the end of 2019 to 104.8 million at Sept. 30, 2020.
IQIYI has been a pioneer in the Chinese online video sector, but its failure to turn a profit in nearly eleven years of existence has made it a takeover target. In the last month, financial media have reported that Alibaba, Tencent and TikTok owner Bytedance have either held informal bid talks with iQIYI’s biggest shareholder Baidu, or examined the matter internally.
The Reuters news agency recently reported that Alibaba and Tencent, which respectively operate rival streaming platforms Youku and Tencent Video, had both walked away from talks. They reportedly considered iQIYI to be over-valued, given the regulatory problems surrounding it. These include: a U.S. government probe into Chinese companies listed on American exchanges; growing anti-monopoly regulation in China; and a probe into iQIYI’s subscriber base by the U.S. Securities and Exchange Commission, that followed publication of an activist investor’s whistle-blowing report.
Given those headwinds, the predators’ concerns over iQIYI’s valuation is understandable. The latest prospectus from iQIYI also included the reminder of the existence of a “poison pill.” It explains that the previous convertible note issues “may dilute the ownership interest of existing shareholders.” Variety calculates that the two previous convertible note issues represent an overhang equivalent to 24% of the currently issued ADRs.