Tencent Buys 28% of Video Producer

Tencent Holdings Ltd. will buy 28% of a filmed content producer from Beijing Enlight Media Co. Ltd., providing the former with new content for its leading online video service while netting a handsome profit for the latter.

Tencent’s video service is fighting a pitched battle for subscribers against rivals iQiyi Inc., which is backed by online search leader Baidu Inc.; and Youku Tudou, which is owned by e-commerce giant Alibaba Group Holding Ltd. A key area where each is hoping to distinguish itself is exclusive content, with all three making major investments to obtain and produce video products for which they have exclusive rights.

The latest deal in that direction will see one of Tencent’s units purchase Enlight Media’s stake in New Classics Media Corp. for 3.32 billion yuan ($524.5 million), Enlight said in a statement (link in Chinese) to the Shenzhen Stock Exchange on Monday. Before the sale, Enlight, itself a video producer, had been New Classics Media’s second-largest shareholder.

Enlight originally purchased the stake in 2013 for 829 million yuan. It said it would post a pretax profit of 2.27 billion yuan as a result of the sale.

“After this transaction, Enlight will not only earn back its original investment but will also make a large profit,” the company said in the statement. “When combined with the company’s own cash flow, this will have a very positive impact on the company’s financial performance in the current quarter.”

Despite their rapid growth, much of it at the expense of traditional TV stations, China’s big online video services are all losing money partly due to big spending on original content. That fact has led top players to rely heavily on their wealthy parents, like Tencent, Alibaba and Baidu, China’s three largest internet companies.

In a bid to recoup some of that cash, Baidu filed last month to make a New York listing for iQiyi, with an aim of raising up to $1.5 billion. The IPO prospectus showed that iQiyi recorded a 3.7 billion yuan net loss last year, widening from a 3.1 billion yuan loss a year earlier. Revenue over that same period rose more than 50% to 17.4 billion yuan.