Meitu, China’s biggest selfie app operator by user number, is set to conduct the largest acquisition in the company’s history as it tries to diversify away from its struggling core business.
The Hong Kong-listed company said on Wednesday that it has entered into an agreement to purchase a 31% stake in Canadian video game developer Dreamscape Horizon. Meitu plans to pay HK$2.7 billion ($342 million) in shares to purchase the stake from Chinese game developer Leyou Technologies.
Wednesday’s announcement did not come as much of a surprise since Meitu has made it clear that it wants to restructure its business due to the increased competition faced by its flagship product, MeituPic, from newer apps with similar functions.
MeituPic, which has photo-editing functions that allow users to try on virtual makeups and make themselves look like anime characters, became a global sensation in 2014, particularly among the young.
As of September last year, the app had monthly active users of over 100 million – or almost one-third of the US population.
However, the app’s appeal has shown signs of waning in the past year as other similar apps have grown in popularity in China. Wutacam and Faceu, two of its hottest rival apps, have about 50 million users each.
Equity investors also appear increasingly unconvinced about the outlook for the business. Meitu’s shares have lost 64% of their value since its initial public offering in December 2016, when the company sold shares at HK$8.5 each. The stock closed at HK$3.09 on Tuesday.
The share price rose by 2.91% on Wednesday, outpacing gains in the broader Chinese and Hong Kong stock markets as investors cautiously welcomed the company's new direction.
CHANGING CONSUMER TRENDS
There is an even bigger concern for Meitu: the declining appeal of photo apps, in general, compared with short-video apps, which enable users to produce and share videos with customised music, stickers and animation effects and are now booming.
The prime example is Douyin, one of the flagship products of Beijing Bytedance, the high-flying startup that is touted as one of the next Chinese technology giants after Alibaba, Tencent and Baidu.
The Douyin app, known as TikTok outside China, was launched less than three years ago and it has already accumulated over 500 million global monthly active users – five times more than Meitu.
Kuaishou, another Chinese short-video app that is tipped to go public in Hong Kong or the US this year, had 259 million monthly active users as of September last year.
It seems a wise move for Meitu to diversify into video gaming, which appeals to a broader user base, rather than go head-to-head with the short-video app developers.
However, Meitu’s already-stretched balance sheet means it had little option other than to settle the purchase with shares.
Meitu booked a net loss of $51 million and reported negative cash flow of $95.4 million for the first six months of 2018. Its short-term liabilities of $1.04 billion were more than five times its $192 million cash holdings as of the end of June last year.
The company plans to issue 991 million new shares – equivalent to 19.08% of its enlarged share capital – to Leyou at HK$2.71 per share, or a 12.3% discount to the stock’s Tuesday close.
Leyou will become Meitu’s second-largest shareholder after completing the transaction.
Dreamscape Horizon is best-known for developing Warframe, a third-person shooter that was among one of the best-selling personal computer games last year.