China's Tencent Buys 12% Stake in Snap--Update

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 still 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."

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.

Analysts said Tencent could be interested in learning more about Snap's format as a way to distribute content in China, particularly as live broadcasts have become so popular in the country.

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 08:44 ET (13:44 GMT)