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Aussies Turn to China

Following Ebay’s acquisition of NetEase and Yahoo’s purchase buy Alibaba, other mergers and acquisitions (M&A) were reported in August involving foreign capital and Chinese internet companies. But this time, the buyer was not a conglomerate from Europe or the United States, but telecom tycoon from Australia.

Telstra Corporation Limited, Australia’s largest telephone company, said on August 31 that it has agreed to acquire a 51 percent stake in China’s SouFun Holdings Limited, which runs China’s top real estate and home furnishings Web site.

The deal is worth US$254 million (2 billion yuan), resulting in a valuation of SouFun exceeding US$500 million (3.95 billion yuan).

The move was Telstra’s first foray into China since its unfortunate Reach joint venture with Richard Li and Pacific Century Cyberworks Limited (PCCW Limited) in 2001, according to industry insiders. 

“SouFun provides an attractive entry point into China, one of the world’s fastest-growing economies,” said Sol Trujillo, chief executive officer of Telstra.

Mo Tianquan, founder and CEO of SouFun, sold part of his shares to Telstra and also to its current investor IDG Venture Capital for US$100 million (790 million yuan). However, he will still remain a significant shareholder with 30.9 percent of the company shares, while the balance will be held by management and IDG Venture Capital.

Despite the merger, Mo and SouFun’s original management team will continue to lead the company, while Telstra’s Sensis team will add senior representatives with key expertise.

Industry insiders said the deal may help SouFun speed up its expansion in China and also set up an overseas stock offer, although there is speculation that the back-out of its former investor Trader Classified Media in this deal may affect SouFun’s listing plans. The company insists it is expecting to seek an overseas listing, most likely in the United States, by the end of this year.

 SouFun, established in 1999, provides information, advertising and listing services to China’s growing online real estate and home furnishings and remodelling sectors. It has become the largest property Web site in China, attracting about 40 million visitors each month and is among the 100 most popular Web sites worldwide, according to Amazon’s Internet-traffic rankings site Alexa.

The successful development of SouFun is the major reason why Telstra chose it as its partner in China. “Its net income has been increasing at a nearly three-figure rate with over 40 million visitors each month,” Telstra said, “and, what’s more, it also has a commercial customer group of over 4,000 dealers and developers.”

Telstra hopes the deal will provide high growth opportunities for its Sensis advertising business. Telstra believes SouFun has a similar model to Sensis’, a subsidiary of the group specializing in classified advertising, according to Sol Trujillo.

Telstra said cash-flow positive SouFun is expected to contribute earnings of A$18 million (US$14 million) in fiscal year 2007.

The US$254 million deal set a new record in terms of volume in China’s recent mergers & acquisitions in the Internet sector. But it carries more significant meaning in the eyes of industry insiders.

“The more important meaning is that this acquisition will constitute a new round of momentum for investment in China’s Internet sector, especially industrial Web sites,” Fang Xingdong, founder of Bokee.net, said in an interview with the China Business Post. “The development of China’s industrial Web sites is not outstanding. But this movement will lead to more capital inflows in this sector.”

This event was already looming as early as 2005 when Trader Classified Media, the world’s largest classified media company, bought 15 percent of SouFun last July for 200 million yuan (US$25 million). It was also given an option to buy the remaining shares in two years if SouFun failed to list by the end of 2006.

Mo explained his decision, saying he considers John MacBain the most outstanding person in the world. “I let Trader into SouFun because of him, so that I myself could learn a lot from him and bring more development to SouFun,” he said.

In this deal with Telstra pushed by MacBain and his father, a former congressman in Canada, Trader also became the largest beneficiary of this deal as it sold all of its 15 percent of shares for US$100 million (790 million yuan), quadrupling its investment within one year.

According to Mo, there are two major fields in SouFun’s ambitious plan: one is to expand its products from new houses and renting to second-hand property, furnishings and industrial research, which will include information and brokerage services in the whole real-estate and furnishing industry. The other is to expand its branches from 40 cities to 100 cities within three years.

Industry insiders also believe this single event reflects new characteristics of Australia’s business strategy in China.

“It is definite that Australia’s investment strategy is undergoing fundamental changes,” said Lu Bowang, an Internet industry analyst with overseas experience in Australia.

Traditionally, Australia conducts business instead of seeking M&As in Asia. Even then, it usually chooses European or American countries with similar political backgrounds as investment targets, according to Lu.

“But now, Australia is investing in China, which means their investment focus is shifting to the East,” Lu said.

Before this merger, another Australian company, the Macquarie Bank Limited attempted to acquire PCCW Limited for as much as US$7 billion (55 billion yuan). Although this move failed because of strong resistance from China Netcom, a major shareholder, it is still looking for other opportunities to invest in China.

China has become Australia’s second largest trade partner.