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Baidu video buyout comes with multiple warnings

Baidu's video buyout comes with several warnings. The CEO of China's top search engine is involved in a $2.8 billion bid for the company's streaming site. Offloading the YouTube-like unit will help Baidu's margins, but selling to the boss raises questions about conflicts of interest. Without more details, investors have no way of judging whether they are getting a good deal.

Robin Li, Baidu's controlling shareholder, has teamed up with Qiyi's chief executive to make an offer for the China's number two online video provider. The pair have offered to buy the US-listed search engine operator's 80.5 per cent stake - worth $2.25 billion on a cash- and debt-free basis.

On the face of it, a sale would bring Baidu financial relief. Online video is an expensive battleground for China's internet giants as advertising revenue fails to keep up with the rising cost of buying and making new shows. Competition is intensifying: Last year, e-commerce group Alibaba offered to take control of top streaming site Youku Tudou at a $5.2 billion valuation.

While Baidu doesn't break out Qiyi's financials, it's clear the subsidiary has been a burden. The $53 billion group's content costs - most of which are related to video - jumped 77 per cent year on year to $144 million in the three months to September. Qiyi knocked 5.4 percentage points off its parent's adjusted operating margin in the same period. That's an expense Baidu can do without as it bets heavily on building up its "online-to-offline" services business. This helps explain why Baidu shares jumped eight per cent on news of the offer.

The problem for shareholders, however, is that details are scarce. Neither Baidu nor Li have disclosed any strategic rationale for the buyout, or future plans for Qiyi. One theory is that the business might command a higher valuation if listed on the Chinese stock market. But if that's the case, it's not clear why Baidu's chairman needs to act as an intermediary. Li's 54 per cent voting stake in Baidu means he can call the shots. For investors, though, it's another reminder that they have about as much influence over the company as Qiyi's online viewers.