Tencent Eyes Big M&A With Mega Bond Program

| About: Tencent Holding (TCEHY)

In writing my final post of the week, I've just come to the realization that all 3 of my daily posts this Friday mention leading Internet firm Tencent (OTCPK:TCEHY), which has just announced a massive bond issuing program almost certainly aimed at future M&A. Perhaps it's not surprising that Tencent's name is showing up in almost everything related to the Internet in China these days, since the company is quickly becoming the nation's dominant online company alongside leading e-commerce firm Alibaba and search leader Baidu (NASDAQ:BIDU).

My other 2 posts today mentioned Tencent's hugely popular WeChat mobile messaging service and its recent new efforts in the online travel space, both of which require relatively large investments. The company already has a huge cash pile to fund such investments, totaling about $6 billion at the end of last year. Now that cash pile looks set to potentially double, following Tencent's latest announcement that it's launching a program to issue up to $5 billion in medium term bonds. (English article; company announcement)

Tencent doesn't give any timetable for specific bond issues and doesn't even specify if it will eventually issue the entire $5 billion in the program. It also doesn't give any purpose for the fund-raising, except to say money will be used for general corporate purposes. But it does say specific purposes will be announced at the time of each individual issue, hinting that the company plans to issue new bonds to fund future big acquisitions.

Tencent's potential money pot of more than $10 billion would allow it to pay cash for most of China's publicly listed Internet companies. Of course few companies do pay purely cash for such purchases, and Tencent's easy access to other forms of credit means it could probably afford to make purchases of up to $30-$40 billion. The company's current cash pile is roughly the same as that of Baidu, China's second largest listed Internet company, which had $6.3 billion in cash at the end of last year. Alibaba probably has similar cash resources, and could see that figure grow bigger still with a planned IPO later this year expected to raise several billion dollars.

This announcement from Tencent comes as the company has made a number of major acquisitions in the past year. In March alone, Tencent announced 3 major deals that were collectively worth nearly $1 billion. Each of those saw it purchase a strategic stake of 15-30 percent in another firm, including e-commerce company JD.com, real estate services firm Leju, and Korean online game company CJ Games. Tencent also made a major investment last year when it participated in a management-led buyout of Activision Blizzard (NASDAQ:ATVI), the world's biggest electronic game publisher.

While all of those deals look interesting, this latest fund-raising adds a new level of excitement to the overheated wave of M&A suddenly taking place in China's fragmented Internet space. That's because the large figure for the bond program implies that Tencent could be eying some major acquisition targets potentially costing more than $5 billion. None of the major M&A deals to occur so far have been worth more than $2 billion, and only a handful have even passed the $1 billion mark.

So, what kinds of big M&A targets might we see Tencent chase? Within China 2 intriguing possibilities could be leading web portal Sina (NASDAQ:SINA), or leading online video company Youku Tudou (NYSE:YOKU), both of which have market values in the $5-$10 billion range. Another interesting possibility could be NetEase (NASDAQ:NTES), whose market value is around $9 billion and is the second largest online game operator behind Tencent. Tencent may also look outside China for targets, and I do expect we could see a blockbuster deal in the $2-$10 billion range within the next 12 months.

Bottom line: Tencent's new $5 billion bond program shows the company is eying major M&A, with one or more deals in the $2-$10 billion range likely in the next 12 months.

Disclosure: None