iQIYI, a Nasdaq-listed Chinese video streaming platform, announced on Tuesday the closing of a private placement of $500 million to Asia-focused alternative investment firm PAG.
PAG, which has over $50 billion in assets under management (AUM), completed the $500-million transaction in iQIYI’s secured convertible senior notes through affiliate PAGAC IV-1 (Cayman) Limited, iQIYI said in a statement.
The deal, which was first agreed on by the two parties in August 2022, will provide iQIYI with the dry powder to enhance and expand business operations, develop original content, and improve working capital, said the firm.
According to the statement, the notes may be convertible into iQIYI’s American depositary shares (ADSs) — or its USD-denominated equity shares available on Nasdaq — with each note currently representing seven Class A ordinary shares.
At the investor’s discretion and subject to the terms of the notes, PAG has the right to swap the notes at an initial conversion rate of about 217 ADSs per $1,000 principal amount of the notes. iQIYI’s stocks were traded at $5.3 upon the market closing on Monday.
With an interest rate of 6% per annum, the notes will mature on the fifth year of the issuance date. Holders of the notes have the right to sell back to iQIYI for cash returns at a price equal to 120% and 130% of the principal amount of the notes on or shortly after the third and fifth anniversary of the issuance date, respectively.
As part of the deal, PAG’s executive chairman Weijian Shan became a member of iQIYI’s board of directors, effective December 30, 2022. The deal also made Shan a non-voting member of the audit and compensation committees of the board.
Beijing-based iQIYI, known as China’s answer to Netflix, is among the country’s biggest streaming service platforms, including Tencent Video, Youku, and Mango TV, which are looking to improve profit margins by raising their membership prices in recent years. However, this approach has struggled, often dampening their subscriber numbers, as consumers in China’s young video streaming market have yet to fully embrace the consumption habit of paying for quality online TV shows and movies.
In the case of iQIYI, the firm introduced three price increases over the past two years, with its auto-renewed monthly membership fee rising 66.7% to RMB25 ($3.6) from RMB15 ($2.2). The firm has over 100 million daily subscribing members.
Despite fierce competition for a bigger stake in the market of largely price-sensitive users, iQIYI enjoyed what its founder and CEO Yu Gong referred to as “an iconic turnaround” in its latest financial results in the third quarter of 2022.
Thanks to a few original blockbusters, iQIYI’s operating income reached 524.3 million yuan ($57.9 million) in Q3 2022, compared with an operating loss of 1.1 billion yuan in Q3 2021 – despite a slight revenue decrease of 1.5%. Its operating income numbers were prepared using non-generally accepted accounting principles (non-GAAP).