YY has recently raised $US 450m for:
General corporate purposes, which may include acquisitions of and investments in complementary businesses and assets, and expansion of our overseas business operations
As the company had over $US 500m of cash prior to the capital raise, they now have close to $US 1bn for expansion and acquisitions. They certainly don’t need that much for organic growth, so it seems logical an acquisition is in play.
Bigo Live is another live streaming platform based in Singapore. Launched in 2016, it now boasts annual revenue of $US 300 million and nearly 30m active users, spending an average of 40 minutes per day.
It’s focus is on Southeast Asia, with significant market share gains in Thailand, Vietnam, Indonesia, Singapore, Malaysia and the Philippines. The company is now entering other key markets where the app is gaining good traction. This includes South America, North America, Europe, Russia and the Middle East.
Bigo raised a Series C funding round earlier in 2017, putting its valuation close to $US 400m.
David Li, founder and interim-CEO of YY, also co-founded Bigo in 2014. In fact, key live streaming technology from YY is licenced to Bigo along with an initial investment when the company was founded. In 2014, YY held 27% of Bigo, however that is estimated to be closer to 20% today due to dilution.
It’s common for an established company to seek acquisitions when the risk is taken out of the equation.
Bigo has rapidly established itself in markets outside of China with the same business model as YY, proving the hugely profitable virtual gifting business model is viable in other markets. It is well positioned to grow globally and have a genuine crack at monetising live streaming in English speaking markets. Much of the risk with a global expansion has been eliminated, with a strong 30 million active users in 12 months demonstrating the huge potential.In March 2017, Bigo raised a Series C round to fund its global expansion from its rapidly established Southeast Asia base. Bigo will continue to need funds for continued growth, which YY can provide with its access to US capital markets and YY’s strong balance sheet.
Two months later, YY’s CEO resigned as due to health reasons and David Li stepped back in as interim CEO. In the most recent conference call, David stated:
I’m excited to return as the acting CEO of the company, and I’m very delighted to talk to old and new friends here. I’m also pleased to help reinvigorate the vision and execution strategy for YY and believe we still have massive growth potential.
In a July article, David stated:
he (David) expects users across the globe to be as willing to pay as those in China, Li said the company believes “overseas users have the same demand, share the same human nature, and follow the same social logic.” David Li clearly still believes in the global growth potential, and is still heavily invested in YY to step back in as interim-CEO. It makes sense for YY to purchase Bigo, David step back into the CEO role permanently and push the company forward into its international growth phase.
Combined, YY and Bigo would be a powerful force in the rapidly expanding live streaming market. The company would have the highest ARPU of any global social platform, 96 million active users, $US 400m in quarterly revenue, with a rapidly expanding global user base.
With the increase in active users and strong global expansion, it’s possible the combined company will achieve $10 EPS within 18 months.
One would need to be in the inner sanctum to understand the best way to structure a deal, however the following is known:
Bigo recently raised a Series C valuing the company at $US 400m. Investors will want a positive return on that investment.
Global expansion is going to cost money, so YY will require a strong balance sheet moving forward to fund continued growth.
On that basis, a purchase of $US 800m for Bigo would make sense. YY already owns approximately 20% of the company. They could pay $US 400m in cash and offer $US 240m in YY equity - providing upside for existing Bigo shareholders.
That leaves YY with approximately $US 600m to fund international expansion of the Bigo brand outside of China. It gives existing Bigo shareholders a rapid return on their recent investment. It dilutes existing YY shareholders by less than 10%.
While, I have no inside information that this will happen, it does seem to make sense for all parties. Either way, YY is heavily undervalued and our fund will continue to hold for the foreseeable future.