腾讯音乐：长音频平台喜马拉雅收购-交易经济评估和关键投资者反馈

Tencent Music announced the previously reported deal for Ximalaya long form audio platformTuesday after market close. The offering states TME will be paying $1.26bn in cash and alsoissuing shares of around 5.3% of TME’s current share base. Inteprerating the purchase pricehere and the deal economics is not straight forward as it looks like baked into here is alsoa rollover of ESOP agreements which will vest over time and could include new retentionpayments for mgmt and employees/ creators. As a result, we estimate the likely purchaseprice to be lower than the headline amount at $2.1bn as lower range and the full headline of$2.7bn as upper range. If we assume dilution for this full amount, the deal is mildly dilutiveat -3% for 2025 and -2% 2026, though we expect the deal benefits to far exceed thesedilutive effects. Stock in near term could come under pressure in anticipation of shareissuance to new mgmt prior to closing and pushback around the high headline price. Withstrong deal benefits and an adjusted price that is fair (though not cheap), we continue torecommend buyers of TME ahead of deal closing. See our prior notes for further details ondeal rationale and synergies:Tencent Music: The premium music tier in China - deep dive intothe opportunity and Ximalaya acquisition synergies and Tencent Music: Potential acquisitionof long form audio platform Ximalaya - Ximalaya key facts and initial thoughts).Breaking down the deal economics and balance sheet impact - likely lower purchaseprice than reported $2.7bn headline due to ESOP:Purchase price likely in the rangeof $2.1bn to $2.7bn headline number as upped range. The headine number puts the dealvalued at $2.7bn but the rather complex descrition of the purchase price also involves arollover for ESOP and very likely retention payments for key management that vests overa number of years. So the actual purchase price component is likely less than the headlinenumber. Based on the latest filings, we see that mgmt and employees share award schemeis around 35% of the share base mainly from 2019 stock option scheme. Factoring thisin and assuming the cash component goes to buy out existing non-staff shareholl,dersthis puts the purchase price close to $2.1bn. After the share issuance the deal results increation of around RMB 27bn in goodwill on the balance sheet and ending cash balanceof ~28bn down from RMB38bn. With TME’s cash flow, we expect no additional debt orissuance required and its capital plan to remain intact.This puts the deal valued at 13-16x PE after adjusting for business deterioration atXML:The latest numbers for XML from 2023 puts the business revenue at RMB 6.16bn,with 56% gross margin but RMB91.4m in operating profit. The business being acquiredshould be performing worse than this prior disclosed amount as MAU has gone down~20% since that time given competition and likely reason for XML selling out. There is alsoRMB1.13bn (17% of 2023 revneue base) that is from a live streaming business, which wewould assume the company would shut down and therefore ascbine no value for.. Assumingthen a 30% net profit margin for this resulting entity, the a reasonable adjusted valuationwould then be in the range of 13-16x for the business.Cont’d on page 3www.bernsteinresearch.com BERNSTEIN TICKER TABLETickerRatingTMEO1698.HKOSPXO - Outperform, M - Market-Perform, U - Underperform, NR - Not Rated, CS - Coverage SuspendedSource: Bloomberg, Bernstein estimates and analysis.INVESTMENT IMPLICATIONSWe rate Tencent Music Outperform TP US$20/HKD78CHINA SMID INTERNET DETAILSCont’d from first pageDeal is mildly dilutive due to high XML base and PE differential with break even synergies in the realm of RMB 1bn:Assuming similar cost levels and our adjustred revenue, the deal is 2% dilutive in 2025 and 3% dilutive in 2026. We expectsynergy levels to far exceed this amount, the most immediate of which would be cost savings in a lot of overlapping sales andmarketing and G&A areas. These would be quick wins to make the deal non-dilutuve in the first year.Investor feedback has been positive going into deal though some pushback overnight include high ticket price, forthe deal, questions around the level of customer overlap and therefore revenue dilution, how integration betweenbrands work:Overnight deal was muted in response largely due to the large number. Even after adjustment, we expect someinvestors to view the deal as expensive - 13x for no-growth, in-decline business. There are also questions around whether thelevel of ESOP and retention of founder is appropriate and whether this would make culture integrations more difficult (manyhave pointed to the issues between mgmt team after KuGou dieal and protracted issues with 2 years to resolve issues in 2016).The main investor question surrounds what is the overlap in customer bases (premium paying, nomral and free) as that woulddrive different package combinations to upsell with varying degress ot impact.Deal value creation to depend