Chinese Tech Giants Tumble On Report Tencent To Sell $24BN Meituan Stake To Appease Beijing

Chinese tech giants backed by Tencent Holdings tumbled after Reuters reported that the social media giant intends to sell all or much of its $24 billion stake in food delivery giant Meituan to appease placate domestic regulators and monetize an eight-year-old investment.

The social media giant has engaged financial advisors in recent months on ways to execute the sale of a roughly 17% stake, Reuters reported citing two sources, adding that Tencent is seeking to kick off the sale within this year if market conditions are favorable.  The planned sale comes against the backdrop of China’s sweeping regulatory crackdown since late 2020 on technology heavyweights that took aim at their empire building via stake acquisitions and domestic concentration of market power.

That crackdown, which has led to billions of dollars in fines for the Chinese tech giants, is reshaping the companies by forcing them to make multi-billion dollar divestments. Tencent, for instance, is exiting a clutch of businesses now and pivoting towards the global gaming market.

“The regulators are apparently not happy that tech giants like Tencent have invested in and even become a big backer of various tech firms that run businesses closely related to people’s livelihoods in the country,” said one of the sources.

The owner of China’s No. 1 messaging app WeChat first invested in Meituan’s rival Dianping in 2014, which then merged with Meituan a year later to form the current company. Based on Meituan’s market capitalisation as of Monday, Tencent’s 17% stake is worth $24.3 billion.

Tencent has been reducing holdings in portfolio companies partly to appease the Chinese regulators and partly to book hefty profits on those bets, said three of the sources. The value of its shareholdings in listed companies excluding its subsidiaries dropped to just $89 billion as of end-March from $201 billion in the same period last year, according to its quarterly reports.

Last December, Tencent announced  the divestment of around 86% of its stake in JD.com Inc, worth $16.4 billion, weakening its ties to China’s second-biggest e-commerce firm. One month later, it raised $3 billion by selling a 2.6% stake in Singapore-based gaming and e-commerce company SEA Ltd, which was seen as a move to monetize its investment while adjusting business strategy

Besides Meituan, Tencent also holds stakes in e-commerce company Pinduoduo Inc, video platform Kuaishou, ride-hailing champion Didi, automaker Tesla and streaming service Spotify

Citi analysts said in a report in January they believed Tencent would further evaluate and reallocate funding from more established investments to newer technology ventures to ride on the industrial internet growth opportunity and to align with its social sustainability initiatives.

“The real fundamental impact of such divestments are usually minimal because business relationships are retained, but there may be short-term pressure not just on Meituan’s share price but also on Tencent’s other investees across the tech industry in China and globally,” said Vey-Sern Ling, a managing director at Union Bancaire Privee.

Last month, China’s market regulator imposed the latest fines on Tencent and Alibaba as well as a range of other firms for failing to comply with anti-monopoly rules on the disclosure of transactions. The regulator also blocked Tencent’s proposed $5.3 billion merger of the country’s top two videogame streaming sites DouYu and Huya last year on antitrust grounds.

Tencent is likely to report its first-ever quarterly revenue decline when it reports earnings Wednesday. In May, the company reported its quarterly profit halved from a year ago and revenues stagnated, blaming cuts in advertising spending by consumer, e-commerce and travel businesses for its worst performance since it went public in 2004

In kneejerk reaction to the news, Meituan slid more than 9% in Hong Kong, the biggest daily percentage decline in five months, mwhile video service Kuaishou Technology fell more than 4% and Bilibili dipped 2.5%. In New York, e-commerce player Pinduoduo Inc. slipped about 3%  Tencent shares dropped more than 2% in Tuesday afternoon trade before recovering to be up 1%.