NetEase to spin off music streaming service in $1bn Hong Kong IPO

Spotify rival Anghami isn’t the only music streaming company with IPO plans in 2021.

Chinese technology giant NetEase Inc. is planning to spin off its subsidiary Cloud Village, which operates music streaming service NetEase Cloud Music, on the Main Board of the Hong Kong Stock Exchange.

That’s according to a listing application filed by NetEase in Hong Kong today (Wednesday May 26).

The filing states that the size of the proposed offering has not yet been finalized, but Bloomberg reports that the IPO could raise approximately $1 billion.

The news of the potentially $1bn NetEase Cloud Music flotation follows the recent hotting up of competition between the music streaming service and its closest rival Tencent Music Entertainment in China.

Tencent was investigated a couple of years ago by anti-competitive watchdogs in China for striking exclusive licensing agreements with the three major music companies in the territory.

TME’s exclusive hold on the music streaming market in the region appears to have been loosened over the past 12 months, following NetEaseCloud Music inking licensing deals with Warner Chappell Music in May 2020, UMG in August 2020 and then Sony Music Entertainment earlier this month.

A report from Reuters last month suggested that, following the investigation, China’s State Administration of Market Regulation (SAMR) could fine Tencent as much as $1.5 billion.

According to today’s filing, NetEase Inc’s Cloud Village subsidiary was incorporated in the Cayman Islands in February 2016 and NetEase Cloud Music has been operated by Cloud Village since October 2016.

The filing states that NetEase’s online music services (i.e. NetEase Cloud Music) had over 180 million monthly active users in 2020. That’s just over half the number of MAUs that Spotify counted worldwide (345m) at the close of last year.

“Cloud Village Group’s business is expected to undergo relatively rapid business expansion and would be appealing to an investor base that focuses on high growth opportunities in the music streaming business.”

NetEase Inc.

Amongst the reasons for the spin-off, according to NetEase, is that “Cloud Village Group’s business is expected to undergo relatively rapid business expansion and would be appealing to an investor base that focuses on high growth opportunities in the music streaming business”.

The filing adds: “[The] value of Cloud Village Group is expected to be enhanced through the Proposed Spin-off, which will in turn benefit the Company as a Controlling Shareholder of Cloud Village, given that a listing on the Hong Kong Stock Exchange will (a) enhance Cloud Village Group’s profile among its users and other business partners, as well as its ability to recruit talent; (b) enable Cloud Village Group to directly and independently access both equity and debt capital markets in the future on a stand-alone basis should the need arise as well as further enhance its ability to secure bank credit facilities.”

Netease Inc holds approximately 62.46% of Cloud Village’s total issued share capital, according to the filing and adds that will hold “not less” than 50% of voting rights of Cloud Village upon completion of the proposed spin-off. NetEase will therefore continue to be the parent company of Cloud Village.

China International Capital Corporation Hong Kong Securities Limited, Credit Suisse (Hong Kong) Limited, and Merrill Lynch (Asia Pacific) Limited are the sponsors for the IPO.

In November 2018, NetEase Cloud Music raised a $600 million funding round from investors including Baidu, General Atlantic, Boyu Capital and several others.

In September 2019, Chinese retail giant Alibaba announced that it had acquired a minority stake in NetEase Cloud Music after leading a $700 million investment into the platform.

At the time, William Ding, the Chief Executive Officer of NetEase Inc, said: “As the controlling shareholder of NetEase Cloud Music, we will continue to fully support the growth of this business, helping it to realize its strategic goals in the music industry.”

According to NetEase, its music service has attracted over 800 million registered users since it launched in April 2013.

The news of NetEase Cloud Music’s IPO in Hong Kong follows a trend over the past few years of music streaming companies opting to trade on the stock markets.

Spotify listed on the New York Stock Exchange in April 2018 and NetEase rival Tencent Music Entertainment started trading on the NYSE under the symbol TME as in December 2018.

In March, prominent Middle Eastern Spotify rival Anghami entered into a definitive merger agreement with publicly traded special purpose acquisition company (SPAC) Vistas Media Acquisition Company Inc. that will will result in Anghami listing on the NASDAQ in New York.Music Business Worldwide