Tencent Holdings will cut stake in JD.com by giving away the majority of its shares to shareholders in the form of a dividend.
This sudden decision by Tencent has pushed its shares up by 5.8% in the early trading hours on Thursday. On the other hand, shares of JD.com dropped by 11.2%.
The share issuance is passed as Beijing tries to control Tencent’s market dominance. Alibaba Group Holding along with other major online platforms is also forced to knock down barriers that prevent users from availing of competing services. This has led the Tencent shares to drop by 43% on Wednesday, after reaching the peak in February.
Tencent is only a minor player in the online platform. It has damaged Alibaba’s share in online retail in the last few years by supporting both Pinduoduo and JD.com.
In response to this new regulatory setting, Travis Lundy, the Quiddity Advisors analyst said that there are not enough benefits to horizontal and vertical integration at present.
Existing shareholders of JD.com are worried about Tencent shareholders acquiring the retailer’s stock. Lundy said that it is like a big offering.
This Thursday, Tencent informed that their board have decided to give away one JD.com share in the exchange of every 21 shares owned by their stockholders. The dividend is 13.30 Hong Kong dollars per Tencent share. This calculation is based on Wednesday’s closing price.
By distributing $457.33 million worth of JD.com shares, Tencent’s stake will dwindle from 17% to 2.3%. Once this happens, the name of the retailer will be removed from Tencent’s books.
This move will be beneficial for Tencent because of the slump in China’s online stocks. Ming Lu, analyst of the Aequitas Research in Shanghai said that JD.com’s market drop will wipe out at least a fifth of Tencent’s earnings this year.
He also mentioned that the situation can become worse if Tencent doesn’t distribute away JD.com shares. The stock prices of JD.com has dropped by 16% this year. On the other hand, rival Alibaba’s stock value has plunged by 49% during the same time. It is expected that JD.com will start following Alibaba in the coming year.
According to the company, JD.com has reached a certain point. This is why the board believes that this is the right time to move a major percentage of the interest held by the company as dividends.
However, both the companies have said that they will remain partners. Chairman of JD.com, Richard Liu said that they share a trusted and close partnership with Tencent. This strategic partnership has helped them to create a more compelling value the society as well as their shareholders.
Thomas Chong, an analyst of Jefferies said that both the companies will maintain their partnership for the mutual benefit of their business.
However, the chief analyst of iiMedia Research, Zhang Yi said that the two companies are no longer holding their strategic relationship.
He also said that JD’s reliance on Tencent is no longer important as before. He stressed the point that the dependency of the two companies has reduced to some extent.
