Why Does Baidu Need $1.5 Billion in New Capital?

November 21, 2012 by Jon C. Ogg

Baidu Inc. (NASDAQ: BIDU) may not seem like your traditional company that would need to raise debt. A filing with the SEC shows that it has priced its public offering of $1.5 billion in two $750 million note offerings. The first offering is at 2.25% due in 2017, and the second is for 3.500% notes due in 2022. When the company filed its shelf registration earlier this month, we saw that Fitch anticipated an “A” rating, and Moody’s assigned an “A3” rating for the credit quality.

The company expects to receive some $1,491.6 million after deducting underwriting discounts, commissions and expenses. Baidu said that it intends to use a portion of the net proceeds to retire certain existing debt and the remainder for “general corporate purposes.” The joint bookrunners of the offering were J.P. Morgan Securities and Goldman Sachs.

What investors need to consider here is that Baidu’s stock is now close to $94 and its 52-week range is $91.81 to $154.15. While Baidu’s market cap is almost $33 billion, Qihoo 360 (NYSE: QIHU) has been pressuring the company as it added a mobile search engine effort in recent days and weeks.

Baidu’s growth rates are becoming more normalized after years of hyper growth: sales grew to $2.3 billion in 2011 from $1.2 billion in 2010 and from $651.5 million in 2009. Sales growth according to Thomson Reuters is expected to be almost 54% in 2012 at $3.54 billion and then slowing again at 36% growth to $4.83 billion in 2013.

Baidu recently reached a deal with Providence Equity Partners to buy its stake of a company called iQiyi. This gives Baidu control over what is said to be the first online video platform in China to focus exclusively on fully licensed, high-definition and professionally produced content. Terms were undisclosed. Saying that terms are not disclosed is intended to mean that the sum will not materially impact a company’s balance sheet nor its earnings reports ahead.

The size of this bond offering is a bit unusual. As of September 30, the Chinese search engine giant had cash and cash equivalents of $3.387 billion, and it listed its net operating cash inflow at $601.3 million with an operating profit of $524.6 million in the third quarter.

With such large margins and with such high cash generation, it seems as though Baidu is about to make a large acquisition. We would advise Baidu’s management to read our Other 10 Worst Mergers of the Past 10 Years if it wants to be too bold.

JON C. OGG

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