The video platform is planning a $700 million capital restructuring that turns Tencent from a core shareholder into a creditor through an equity-to-debt deal

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Key Takeaways:

  • Bilibili’s move would pretty much cancel out Tencent’s 9.6% equity stake, but the tech giant would get $200 million of convertible notes
  • Paired with a share placement and buyback, the transaction aims to cushion Bilibili’s share price and limit dilution, but growth remains a concern   

Despite pulling out of the red, Bilibili Inc. (9626.HK) (NASDAQ:BILI) has yet to put investor concerns to rest. Doubts remain about whether the video platform dubbed "China’s YouTube" can accelerate revenues and boost its profit potential.

At this point, the company’s longtime strategic investor, Tencent Holdings Limited (OTC:TCEHY) (OTC:TCTZF) (0700.HK), has opted to make an almost complete equity exit. Under a $700 million capital restructuring, the tech giant will switch from being a core shareholder in Bilibili to a major creditor, albeit with an option to convert its holdings back into equity if the stock makes healthy gains in the future.

Bilibili, meanwhile, is using part of the proceeds to ease downward pressure on its share price and limit dilutive effects.

The transaction announced on Sept. 4 combines convertible notes, a share placement and stock repurchases. Bilibili plans to issue $700 million of zero-coupon convertible senior notes, using $300 million of the proceeds for a simultaneous share buyback. Tencent will sell its roughly 9.6% stake and subscribe for $200 million of the notes, which will mature in 2031.

Institutional investors are to be offered $500 million of the notes, with Tencent taking the rest. The notes, which will not pay regular interest, have an initial conversion price of HK$155.79, a 28.3% premium to Bilibili’s close on the day of the announcement and 35% higher than the equity placement price. Holders may opt for early conversion and have the right to require Bilibili to repurchase the notes at principal in September 2029.

Tencent originally held about 40.01 million ordinary shares in Bilibili. Under the proposed plan, about 26.37 million shares are to be sold to other investors through a secondary placement at HK$115.38 per share, while Bilibili will repurchase another 13.59 million shares for $200 million. Upon completion, Tencent would be left with about 48,000 shares, reducing its stake to virtually zero.

Supporting share value

Tencent is selling shares worth nearly $600 million and will effectively cash out about $400 million after taking its portion of the notes, with the subscription cost offset against the repurchase price payable by Bilibili. Some market observers have interpreted the elevated conversion price as a sign of confidence, but if Bilibili shares languish below that level Tencent can keep hold of the notes and get the principal back in 2029.

Convertible-note investors typically short the underlying shares as a hedge, which in this case would mean underwriting banks would borrow about 6.98 million shares. To mitigate the selling pressure, Bilibili is spending about $100 million to repurchase roughly 6.8 million shares. If both transactions are completed, the company will have repurchased and cancelled around 20.39 million shares, equivalent to about 4.9% of its existing share capital.

If the notes are fully converted, Bilibili could issue up to 35.24 million shares, equivalent to about 8.4% of its existing share capital. After taking the concurrent repurchases into account, the potential net increase would be about 14.85 million shares, implying net dilution of roughly 3.5%. The stock could also face additional hedging-related pressure if the shares approach the conversion price.

Bilibili expects net proceeds of $690.4 million. After deducting the $300 million earmarked for share repurchases, about $390.4 million will remain to invest in AI-driven growth and general corporate operations.

Nomura believes Tencent’s orderly exit should help remove technical selling pressure, but it maintained a "neutral" rating on Bilibili’s U.S.-listed shares and a price target of $18. On the first Hong Kong trading day after the announcement, Bilibili fell as low as HK$116.4 before reversing course to close 1.98% higher at HK$123.8. The stock is still down about 35% this year, reflecting continued caution over its outlook.

Growth in question

Bilibili has the financial means to support its capital restructuring. At the mid-year point, it held 24.3 billion yuan ($3.62 billion) in cash, time deposits and short-term investments, while $336.7 million from convertible notes it issued last year remains unused. The bigger question is whether the new financing can generate returns that outweigh the costs of dilution and debt repayment.

Bilibili’s revenue rose 8% to 7.94 billion yuan in the second quarter from the year-earlier period, while net profit jumped 55% to 339 million yuan. Gross margin rose for the 16th straight quarter, reaching 37.2%. Advertising revenue grew 28% to 3.13 billion yuan, becoming the company’s largest revenue source for the first time. Daily active users increased 7% to 116.5 million, while average daily time on the platform reached 113 minutes, driving a 14% rise in total time spent.

But the growth mix remains uneven. In the second quarter, value-added services grew just 5%, while revenue from mobile games fell 14% to 1.39 billion yuan, leaving advertising as the main growth engine. AI can improve content recommendation, creation and advertising efficiency, but the company has not separately disclosed the amount of its AI investment or its expected returns. Projecting advertising growth to slow in the second half while AI investment rises, Nomura previously cut its price target to $18 from $22.50.

If everything goes to plan, Bilibili will retain about $400 million in funding and will dampen the potential ongoing selling pressure. The returns will depend on Bilibili’s ability to find new growth drivers and reap rewards from its AI investment. The capital transaction may have bought the company time, but the ultimate value has yet to be determined.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.