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China search giant Baidu ( BIDU ) announced Friday that the company has received a non-binding proposal from two Baidu executives to acquire the company’s fast-growing Qiyi video wing for $2.8 billion. Already one of China’s largest online video streaming services, Qiyi is looking to become a bigger force in the country’s video-streaming and moviemaking fields, a nearly $6 billion market that also includes Baidu rivals Alibaba Group ( BABA ), Tencent Holdings ( TCEHY ) and Sohu.com ( SOHU ). Last year, Netflix ( NFLX ) said it wants to begin operating in China, but the streaming media company has expressed uncertainty about its planned move into the country by 2016. Baidu stock jumped on the news and was up 8% in afternoon trading in the stock market today , near 152. But Baidu stock is down 26% this year. The non-binding proposal came from Baidu CEO Robin Yanhong Li and Qiyi CEO Yu Gong, Baidu said. The pair have proposed acquiring all of the outstanding shares of Qiyi owned by Baidu based on an enterprise valuation of U.S. $2.8 billion. Should a special committee formed by Baidu to review the offer approve the deal, Qiyi will remain a strategic partner, although it will be independent. Baidu currently owns 80.5% of Qiyi’s total outstanding shares. The transaction would “significantly help Baidu’s margin improvement,” wrote Summit Research analyst Henry Guo in an industry note Friday. “Currently, Qiyi still operates as a loss-making business due to strong video contents competition among deep-pocket players including Tencent and Alibaba Group. “For the past couple of quarters, the Qiyi business had about 5%-6% of negative operating margin impact to Baidu. According to our estimates, iQiyi, as a stand-alone business, had a negative 40%-50% of operating margin in 2015.” Strong Q3 growth for Baidu’s Qiyi video wing was largely due to the company’s aggressive video content acquisition, said Guo, who added that Qiyi’s “content cost was up 84% year over year in Q3, and we have forecasted it to double year over year in the December quarter.” Last year, Alibaba bought out Youku Toudu, a rival streaming content service provider, for $3.7 billion. Guo added that the “valuation implied in Alibaba’s October 100% acquisition of Youku Tudou hurts Qiyi’s negotiation power as Qiyi looks for extra funding to support its aggressive content strategy.” Baidu is to report Q4 earnings after the close on Feb. 25. Last month, Baidu denied a report that it planned IPOs in China for nine of its subsidiaries, including Qiyi. Image provided by Shutterstock . Scalper1 News
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