Alibaba to Buy Youku Tudou Stake - Analyst Blog

China's e-Commerce giant Alibaba and Yunfeng Capital, a private equity company controlled by Alibaba's founder, Jack Ma, agreed to acquire a combined 18.5% stake in Youku Tudou for $1.22 billion.

Formed in 2012, Youku Tudou is China's leading online video company that broadcasts popular television programs and other videos over the Internet.

The acquisition follows the announcement of the multi-billion Alibaba IPO which is expected to garner over $15 billion. After Google Inc. (GOOGL) and Twitter Inc. TWTR. IPOs that raised $1.9 billion in 2004 and $2.09 billion in 2013, respectively, Alibaba is expected to be the next largest Internet stock in the U.S. market, close to Facebook Inc. FB, which earned about $16 billion in 2012.

Per the terms, Alibaba will hold about 16.5%, while Yunfeng will have about 2% of Youku. Additionally, Jonathan Lu, Alibaba's chief executive officer, will join Youku Tudou's board. The latest move is another of Alibaba's strategies to establish its foothold in the web video content market and boost its video advertising returns.

More than half of the population in China use mobile devices to access the Internet and Youku Tudou is developing shows to improve the viewing experience for the increasing number of viewers. We believe that video content service is one of the important medium through which Alibaba can launch new products and services.

According to a report by Internet consultant iResearch, China's market for online video will reach 17.8 billion yuan ($2.85 billion) this year, which will further jump to 36.6 billion yuan in 2017. To tap this opportunity, Alibaba is making continuous efforts to extend its e-Commerce reach to mobile, video and distribution business.

In 2013, the company acquired Internet video business PPStream, Inc. for $370 million and is integrating it with IQiyi.com, acquired in 2012. Additionally, last month, Alibaba invested $700 million in Intime Retail Group Co., which owns department stores and supermarkets in China, to bolster its mobile and distribution businesses.

Founded in 1999, Alibaba is primarily owned by Yahoo! Inc. YHOO (24%), Japan's Softbank Corp. (37%) as well as other founders and senior managers (17%). With more than 20,000 employees, Alibaba competes with Tencent Holdings Ltd. (700) and Baidu Inc. BIDU to attract more users to go online for movies, music, television shows and books.

With a huge market presence, strong business profile and immense future growth prospects, we believe Alibaba enjoys a robust global competitive edge and sales flow greater than the combined offerings of its peers, Amazon.com Inc. AMZN and eBay Inc. EBAY. Going ahead, the stake in Youku Tudou would further support Alibaba's long-term expansion and growth strategies.