Tencent (TCEHY), the Chinese game maker and messaging app giant, and Spotify, the U.K. streaming music service company, are in talks to swap stakes in each other’s companies ahead of potential initial public offerings by the two in 2018.
Citing people familiar with the matter, The Wall Street Journal reported that Tencent’s music group—dubbed Tencent Music Entertainment Group—has a lower valuation than Spotify and as a result will pay the difference in cash so that both companies own an equal stake. Under the deal. the two would combine their services in licensing negotiations with music labels, reported the Journal, noting that Spotify had reached out to Chinese investors last year but didn’t garner much interest because it's not active in the Chinese market and has no plans to do so. Tencent, on the other hand, has invested in companies located outside of China and is looking to grow its music unit ahead of an IPO. Tencent is gearing up to take its music unit public in 2018 as a way to monetize its music streaming apps. Tencent Music could list in New York or Hong Kong with the IPO happening potentially close to the end of the first half of 2018. (See also: Can You Hear the Music? Spotify Dances Towards IPO.)
Searching for Partners
In September, Bloomberg reported that Tencent is looking to get a valuation of around $10 billion for the music group by selling a 3% stake ahead of any IPO. The company, which owns karaoke and music streaming apps, was in talks to sell the stake to strategic partners including record labels. Parent Tencent owns a 62.45% stake in the company as of the end of 2016. Selling a piece of it to record labels would help Tencent Music to maintain music streaming rights in a market that is getting more competitive. (See also: Tencent Music to Sell 3%, Valuing Itself at $10B.)
While Tencent has more users than Spotify, the latter has had huge successes in turning its listeners into paid subscribers giving Tencent valuable insight. According to the Journal, Spotify has been able to turn more than 60 million of its 140 million users into paying customers.
Tencent hasn’t been shy about making investments in all sorts of firms including beleaguered Snap Inc. (SNAP), maker of Snapchat, the disappearing-message app. According to a Securities and Exchange Commission filing from Snap early last month, the app maker said Tencent has purchased 145.8 million non-voting shares during the last quarter, which ended in September, giving it a 10% stake. Tencent had previously invested in Snap back in 2012 and then again in 2013.