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Billionaire Li drops bid for Baidu's Netflix-like video unit

[HONG KONG] Baidu Inc's billionaire Chairman Robin Li pulled out of talks to buy control of the company's streaming video service iQiyi after failing to reach an agreement on its price and structure.

An investor group led by Mr Li and Inc Chief Executive Officer Yu Gong offered to buy out Baidu's 80.5 per cent stake in February - a deal that conferred a US$2.8 billion enterprise value on the Netflix-like service. The pair informed the board they're retracting that offer after failing to strike a deal despite several rounds of discussions, Baidu said Monday.

The collapse of talks comes a week after the proposal drew sharp criticism from shareholder Acacia Partners LP,which condemned the price as "far too low" and cited research valuing at US$5.8 billion. Selling the loss-making streaming business had been viewed as important to whittling down rising expenses as China's largest search engine spends billions diversifying its business, from on-demand internet services to driverless cars and artificial intelligence.

The purpose of separating from the core business was to raise money in China's stock market, said Henry Guo, an analyst at M Science LLC. The deal was scrapped because of changes in the regulatory environment that's made it difficult for loss-making companies to go public, and not because of the opposition from Acacia Partners LP, Mr Guo said.

"It's really hard for the iQiyi business to go public anytime soon in China - the business has to be profitable," Mr Guo said in an interview. "In the future, huge investments in iQiyi will continue to pressure Baidu's business. It's a negative for current stockholders.", whose video streaming service is known as iQiyi, said it hit 20 million paying subscribers in June.

Baidu has been incurring rising costs on streaming. Selling the division would have reduced expenses and given it a US$2.3 billion cash injection, Moody's Investors Service said in February. The buyers may have eventually been able to list iQiyi as a standalone company on local Chinese bourses, potentially at a much higher multiple. Jefferies Equity Research on Monday told clients that the tech giant's non-GAAP operating margin would improve by 7.5 per cent to 8 per cent if both sides sealed a deal.

Advertising revenue growth in its core search business is on the wane, thanks in part to a string of new regulations imposed by the Chinese government.

"As the Buyer Group and Baidu had not been able to reach an agreement on transaction structure and purchase price after rounds of discussions and negotiations, the Buyer Group had determined not to proceed," Baidu said in a statement, adding that the withdrawal takes place with immediate effect.

In June, Baidu cut its revenue forecast for the second quarter, citing falls in ads from drug companies and other health-care groups.