Moody's Sees Baidu's (BIDU) Potential Qiyi Sale as Credit-Positive Development

Moody's Investors Service says Baidu Inc.'s (A3 positive)(Nasdaq: BIDU) potential sale of its 80.5% stake in Qiyi (unrated) -- if completed -- is credit positive, because it will lower Baidu's investment and improve its profitability while retaining strategic benefits.

On 12 February, Baidu announced that it had received a non-binding proposal from Mr. Robin Yanhong Li, the chairman and chief executive officer of Baidu, and Mr. Yu Gong, the chief executive officer of Qiyi.com, Inc., to acquire all outstanding shares of Qiyi beneficially owned by Baidu -- based on an enterprise valuation of $2.8 billion for 100% of Qiyi -- on a cash-free and debt-free basis.

Moody's expects that Qiyi -- one of the largest online video service provides in China (Aa3 stable) will remain a strategic partner of Baidu after the transaction and enter into business cooperation agreements with Baidu. Baidu currently owns 80.5% of Qiyi's total outstanding shares on a fully-diluted basis.

"We expect the sale, if completed, will raise approximately $2.25 billion in cash for Baidu. In addition, Qiyi's operating loss will be de-consolidated from Baidu, thereby increasing its adjusted EBITDA margin by roughly 5%," says Lina Choi, a Moody's Vice President and Senior Credit Officer.

"Going forward, the sale would also lower the capital required by Baidu to acquire and develop content for the online video business, while the ongoing strategic cooperation will ensure Baidu retains its access to Qiyi's large and sticky user base," adds Choi, also the Lead Analyst for Baidu.

Baidu was among the first investors in Qiyi, and started consolidating the online video provider's financials in 1Q2013. Baidu merged Qiyi with PPS (unrated), a peer-to-peer online video transmission service provider, in 2Q2013. However, the high bandwidth, content development and acquisition costs, mean the combined online video business has been reporting losses. Based on management guidance, Qiyi weighed on Baidu's consolidated EBITDA margin by approximately 500basis points in 2015.

In addition to improving Baidu's margin, Moody's says the proposed transaction also illustrates Baidu's financial prudence.

Baidu's other non-search businesses such as Qunar (unrated, online travel business) and Nuomi (unrated, online to offline local services) are all generating operating losses, owing to the subsidies they offer to consumers in order to educate the users and enhance their stickiness to online services.

Since 2015, Baidu has introduced more strategic and financial investors to invest in various assets in its portfolio.

In November 2015, Qunar completed a share swap with Ctrip (unrated) that resulted in the largest online travel service platform in China in terms of transaction volume, according to Analysys (unrated), a third-party market research firm. This move also helped reduce Baidu's operating expenses and future investment needs.

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