Tencent’s stake sale in Sea not about regulatory risk: source

Last week’s decision by Chinese tech giant Tencent Holdings to sell part of its stake in Singapore’s Sea came not due to local regulatory risks, but simply to cash out on an investment, a source close to the deal told Caixin.

The sale on Tuesday, which tanked New York-listed shares of the Southeast Asian gaming and e-commerce giant, brought speculation that antimonopoly concerns had forced Tencent’s hand.

China‘s most valuable listed tech company gave no clear reason for the divestment but said it would provide “resources to fund other investments and social initiatives, while retaining a substantial majority of its stake in Sea.”

Speaking on condition of anonymity because they were not authorized to discuss the matter publicly, a Tencent source denied that regulatory concerns were a factor, echoing the company’s official line.

Nevertheless, the reduction of Tencent’s voting rights could curb regulatory risks for the Singaporean giant in other markets where hostility toward Chinese firms is growing, experts told Caixin.

Shares of Sea landed on the New York Stock Exchange at $15 a share in 2017. The firm’s share price has since made strong gains and peaked at $367 in October last year.

On Tuesday, the two companies announced that Tencent trimmed its stake in Sea by selling shares worth $2.8 billion to $3 billion, sparking a sell-off among investors. Sea’s New York-listed depositary receipts fell 11.4% that day. Its price rebounded 4.35% on Thursday.

Tencent sold the shares at $208 apiece, a discount of 6.9% to the previous close. After the sale, Tencent’s stake in Sea declined from 21.3% to 18.7%.

Despite the discount, the deal was a profitable one for Tencent, considering its investments in the company weighed against Sea’s current market capitalization. Tencent had participated in five rounds of funding to Sea between 2014 and 2017, investing a total of approximately $268 million, according to its prospectus. Based on the company’s closing price on Wednesday, Tencent’s remaining 18.7% stake was worth $19.3 billion, more than 70 times its pre-IPO investment.

Tencent’s divestment comes less than a month after the WeChat owner said it would offload more than $16 billion of JD.com stock as a one-time dividend, cutting most of its stake in the e-commerce giant.

A Tencent source previously told Caixin that deal was in part a response to regulatory risks after Beijing vowed to curb monopoly and anticompetitive behavior in the tech sector.

The motive behind the sale of Sea’s shares is different compared to the deal with JD.com, Caixin understands. The deal with Sea was merely for financial returns, the source said.

Apart from paring its stake, Tencent will give up a large share of voting rights. The “Class B” ordinary shares held by Tencent – each share has three votes – will be all switched to “Class A” shares featuring one vote per share, according to the Tuesday filing from Sea. After the changes, Tencent’s voting rights will be lower than 10% while that of Forrest Li, founder and chairman of Sea, will rise to 57%, the filing reads.

Some market insiders said the stake reduction could ease the regulatory risks that Sea faces in foreign markets. Although Sea is not a Chinese company, it has always been regarded as an agent of Tencent outside China, Li Jianggan, CEO of Momentum Works, a consultancy for Southeast Asian tech ventures, told Caixin. Tencent’s share sale and relinquished voting rights could send a message to regulators and investors that this was not the case, he said.

In the current geopolitical situation, even if a Chinese company is only a financial investor, having some degree of control over a foreign company it invests in can raise concerns from local governments, said Ding Xinyan, a partner of Yincubator, an investment services provider.

Authors: YANG MIN, WEI YIYANG, QIAN TONG and GUO YINGZHE, NIKKEI Asia

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