Sohu Quashes Private Buyout Rumors - Analyst Blog
08 March 2013 - 11:00PM
Zacks
Sohu.com
(SOHU) quashed recent rumors of going
private in an 8K filed with the Securities Exchange Commission
(“SEC”). The Chinese online media, search and mobile service
provider announced that it has not approached any investment bank
and private equity fund to take the company private.
Sohu also denied rumors about
delisting its common stock from the NASDAQ Global Select Market.
The statement from Sohu was in response to a report from South
China Morning Post, which claimed that the company is in talks with
investment banks about financing for a potential private
transaction. South China Morning Post cited four industry sources
as the base of its report.
Following the news, Sohu’s share
price jumped approximately 12.0% to close at $48.84 on Mar 5, 2013.
However, post the 8K filing on Mar 6, Sohu’s share price declined
approximately 11.0%. Over the past 12 months, Sohu has
underperformed the broader market as its share price declined 9.2%
versus a 12.6% growth in S&P 500.
The underperformance is due to
investors’ skepticism on Sohu’s ability to remain profitable in the
near term. Although Sohu reported a better-than-expected fourth
quarter of 2012 beating the Zacks Consensus Estimate on both lines,
margins contracted sharply primarily due to higher operating
costs.
Operating expenses as a percentage
of revenues were 47.3% compared with 40.1% in the year-ago quarter.
The increase was primarily due to higher product development costs
(up 51.5% year over year) and sales & marketing expenses
(surged 49.9% from the year-ago quarter). Operating margin declined
to 21.5% from 30.9% in the year-ago quarter.
Sohu is a relatively small player
in the online Chinese advertising market and continuing investments
in product development are necessary to expand market share. This
is expected to hurt its profitability in the near term.
Moreover, we believe that market
share gain will be difficult in the near term. Sohu faces stiff
competition from Baidu (BIDU) in
search and advertising, Youku Tudou
(YOKU) in online video and
NetEase (NTES) in online gaming
markets.
In such a scenario, we believe that
the private buyout rumor creates uncertainty for investors.
Although a better buyout offer will be positive for investors, we
believe that current sluggish macro-economic conditions in China
will act as an impediment toward fetching a higher price.
We also believe that Sohu’s strong
product pipeline and the growing popularity of Changyou’s games
will drive profitability going forward.
Currently, Sohu has a Zacks Rank #3
(Hold).
BAIDU INC (BIDU): Free Stock Analysis Report
NETEASE INC (NTES): Free Stock Analysis Report
SOHU.COM INC (SOHU): Free Stock Analysis Report
YOUKU.COM- ADR (YOKU): Free Stock Analysis Report
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