By Steven Russolillo, Saumya Vaishampayan and Maureen Farrell
Less than a day after Snap Inc. posted weak results that sent
its shares plunging, the struggling social-media and camera company
disclosed that Chinese internet giant Tencent Holdings Ltd. bought
a 12% stake, becoming one of its largest shareholders.
Tencent, an early pre-IPO backer of Snap, recently acquired
roughly 146 million of its shares in the public market, Snap said
in a filing Wednesday. The purchase adds to an investment Tencent
made in Snap in 2013 during a fundraising round before the company
went public.
Tencent didn't disclose what price it paid for the shares, but
as recently as Oct. 6, executives were discussing raising its stake
through share purchases on the open market, a person familiar with
the matter said. That would mean Tencent would have likely spent at
least $2 billion acquiring the stake based on Snap's minimum share
price in this period.
The disclosure comes one day after Snap's quarterly results fell
short of Wall Street's expectations. The company failed to
significantly add to the number of people using its app on a daily
basis. The amount of money advertisers are spending on Snapchat to
reach those users also disappointed investors.
The results marked yet another stumble for the Los Angeles-based
company, which went public in March in the biggest U.S. initial
public offering in years. Shares fell 20% in after-hours trading,
but pared losses in early trade before the opening bell on news of
the increased Tencent stake.
"We have long been inspired by the creativity and
entrepreneurial spirit of Tencent," Snap said in a filing, "and we
are grateful to continue our longstanding and productive
relationship that began over four years ago."
The company added that Tencent's president, Martin Lau, said the
company "is excited to deepen its shareholding relationship with
us, and that it looks forward to sharing ideas and
experiences."
Tencent executives began discussing raising its stake in Snap in
September, after the U.S. company's shares touched several record
lows in August, a person familiar with the matter said. Tencent
wanted to support its investment in Snap during the U.S. company's
weakened state, the person said.
Shenzhen-based Tencent is well known in Asia for being one of
the world's biggest videogame makers as well as owning the hugely
popular social-media and mobile payment app WeChat. Its shares have
more than doubled this year as profit has swelled.
Earlier this year, Tencent bought a 5% stake in Silicon Valley
electric-vehicle maker Tesla Inc. In a tweet at the time, Tesla
Chief Executive Elon Musk said he was "glad to have Tencent as an
investor and advisor to Tesla."
When Snapchat was first shown to Tencent's executive team years
ago, founder Pony Ma was bewildered as to why it was a hit,
according to two people who attended the meeting. Mr. Ma joked that
he didn't understand young people, the people said. Nonetheless,
Tencent later still purchased a small stake in Snapchat.
In its March IPO, Snap sold Class A shares that carry no voting
rights. When it filed for its IPO, the company described the sale
of nonvoting shares as an unprecedented move in a U.S. IPO.
The company's co-founders, Evan Spiegel and Robert Murphy, are
the only owners of Class C shares, which control about 90% of the
voting rights. Early investors hold Class B shares that get a small
portion of the voting rights.
Companies with multiple classes of stock typically give IPO
investors fewer votes per share than they give to founders,
executives and early private investors. The power of the
"supervoting" shares is typically diluted over time as new shares
are issued. But Snap's decision to sell nonvoting shares was
extreme. Messrs. Spiegel and Murphy's proportional voting control
wouldn't materially change when new shares are sold because the
common stock doesn't have voting rights.
Since Snap's debut, there has been broader push back against
these structures. In August, the keepers of the S&P 500 said
they would bar new public companies with multiple classes of shares
from their flagship index. That policy change rejects potential
eligibility for Snap. Other indexes have been weighing similar
moves.
Wednesday's filing said neither Tencent nor Snap are obligated
to disclose changes in Tencent's ownership of Snap shares in the
future as a result of its ownership structure. Significant holders
of the nonvoting Class A common shares are exempt from the
obligation that generally requires them to report ownership
changes, Snap said. That means Snap can reveal investor stakes
strategically -- informing the market when it deems helpful but
keeping mum if the stakeholder sells.
Barring index entrance means that Snap's stock price won't get
the benefit of forced buying from popular S&P index funds. Some
$8.7 trillion in assets is benchmarked or indexed to the S&P
500, according to S&P Dow Jones.
The growing popularity of multiple share classes has met
resistance from some of the largest providers of passive
investments, which own an increasingly large slice of America's
biggest companies and don't want their influence minimized.
BlackRock Inc., Vanguard Group and State Street Global Advisors,
the world's largest managers of index-tracking funds, are signers
of a governance initiative called the Investor Stewardship Group
that sets principles for U.S.-listed companies including the
adoption of a "one-share, one-vote standard" and avoiding unequal
voting rights.
--Wayne Ma contributed to this article.
Write to Steven Russolillo at steven.russolillo@wsj.com, Saumya
Vaishampayan at saumya.vaishampayan@wsj.com and Maureen Farrell at
maureen.farrell@wsj.com
(END) Dow Jones Newswires
November 08, 2017 08:55 ET (13:55 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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