What would TikTok sale mean for Bytedance IPO?

US bans TikTok

US President Donald Trump has exercised special executive orders that will ban US businesses from working with video-sharing social network TikTok, owned by Chinese outfit Bytedance, from 15 September 2020.

An identical but separate order was made against messaging app WeChat that is owned by fellow Chinese firm Tencent.

The US government also released a separate statement on 5 August that announced an expansion of the country’s ‘Clean Network’, which is ‘the Trump Administration’s comprehensive approach to guarding our citizens’ privacy and our companies’ most sensitive information from aggressive intrusions by malign actors, such as the Chinese Communist Party’.

Why is the US banning TikTok?

The US believes Chinese tech companies ‘threaten the national security, foreign policy, and economy of the United States’ and are concerned that the data of American citizens collected by the likes of TikTok could fall into the hands of the Chinese government.

Those concerns gained momentum when China introduced new laws in 2017 that said all Chinese companies had to co-operate with intelligence services if asked, prompting fears Bytedance and others could be forced to hand data over to authorities.

TikTok has been under the spotlight since last year, when prominent senators from both sides, led by Republican Tom Cotton and Democrat Charles Schumer, called for the national intelligence services to investigate the risk posed by TikTok, which has been downloaded by over 100 million Americans.

This is the latest move in a prolonged battle between the US and China. Trump was initially focused on rebalancing trade between the two countries, but the battle has evolved and is now centred on the US trying to prevent China’s attempts to become the world’s leading superpower.

The trade war has drawn mixed reactions among US politicians but there is much more support for addressing China’s growing influence on vital technology in the US and the world. The US has already ousted Chinese outfit Huawei, the largest supplier to the telecoms industry in the world, from its 5G networks over security concerns and exerted pressure on other countries to do the same.

Read more: What does the UK ban on Huawei mean for telecoms stocks?

The US isn’t the only country wary of TikTok. The app was one of a slew of Chinese apps that were recently banned in India, and the European Union (as well as individual ones being conducted by France and the Netherlands) and Japan are among those considering whether the app poses a threat to national security.

It is important to remember that China’s strict censorship rules means most Western companies, like Facebook and Alphabet’s YouTube, are banned outright in the country.

The president has also picked China as the primary enemy to rally voters ahead of the election in November, and it is notable that the 15 September deadline gives companies just 45 days to comply, and falls at a key time during the election campaign.

How has TikTok responded?

TikTok was ‘shocked’ by the ban and said it was issued ‘without any due process’.

‘For nearly a year, we have sought to engage with the US government in good faith to provide a constructive solution to the concerns that have been expressed. What we encountered instead was that the Administration paid no attention to facts, dictated terms of an agreement without going through standard legal processes, and tried to insert itself into negotiations between private businesses,’ TikTok said in a statement.

It went on to say it will ‘pursue all remedies available to us in order to ensure that the rule of law is not discarded and that our company and our users are treated fairly – if not by the Administration, then by the US courts.’

Bytedance has made an effort to try and allay fears over its ties to the Chinese government and the way it collects and stores data on US citizens. TikTok said it ‘has never shared user data with the Chinese government’ and wouldn’t if it was ever asked. It stores data on its US users inside the country with a backup in Singapore.

It has not made TikTok available in China (instead leaving that to its highly censored twin app Douyin) and it even pulled out of Hong Kong in protest of China introducing the controversial new security law in the territory earlier this year. TikTok is also now being led by Kevin Mayer, the former head of streaming at US media giant Disney, in the hope he can provide some comfort to nervous politicians.

Will Bytedance sell TikTok?

Details on how TikTok and others will be banned are thin on the ground and the government has said it will release more details when the deadline expires. It is expected to follow a similar format to how it handled Huawei, which didn’t ban the company outright but made it impossible for US telecoms companies from working with the company and abide by the law.

However, there is a reason why the government hasn’t focused on the details of the ban and that is because it hopes it won’t have to be enacted. Trump has said TikTok’s US operations could be sold to a US company and even claimed that the government should receive a ‘substantial portion’ of any purchase price because it is ‘making it possible’.

If a US company controls TikTok in the US, then it will also control the data and can remove any fears stemming from the company’s relationship with the Chinese government.

TikTok said in its response to the government’s order that it has ‘expressed our willingness to pursue a full sale of the US business to an American company’.

Still, it is now in a position where it either can sell it and realise the value of the app or keep it and lose any value it has in the country.

What company could buy TikTok’s US operations?

Many companies have been touted to buy TikTok. Twitter was rumoured to be interested but TikTok’s valuation is expected to be too grand for the social media firm, while it has been reported that Apple has no interest in making a move. Only one real contender has emerged and that is Microsoft, which is reported to be leading the charge to buy TikTok in the US before 15 September.

TikTok would offer any buyer an instant winner but it will not be easy. The app was created after Bytedance bought Musical.ly, another Chinese app that had become popular among US users. It then merged this with Douyin, its original Chinese short-video app, to create TikTok. Notably, US politicians called for investigations to be made into the company back then.

TikTok is popular in several countries outside of the US, including in Canada, Europe, Australia, New Zealand and India. It is not clear whether any potential buyer will look to purchase the app’s operations in other countries or just the US.

This means they could have the huge task to separate TikTok’s US operations from other countries in addition from isolating it from its Chinese twin Douyin, which it is built on. It is impossible to negotiate a deal and carve-out TikTok in just 45 days, so it is likely that any potential buyer will look to seal a deal before the 15 September deadline, but completing the deal will take much longer.

Some reports have suggested it could take a year or more for TikTok to be formally sold, but it is thought the US government would be comfortable with this so long as it is managed by the American company in the meantime.

How much is TikTok worth?

The other big question is how much TikTok is worth. Bytedance is not a listed company and therefore its financials are not made public, so it is difficult to gauge a valuation. Plus, the valuation will differ depending on whether you’re talking about TikTok in the US or TikTok as a whole.

It was widely reported that Bytedance as a whole made over $17 billion in revenue and $3 billion of net profit in 2019, but most of that came from selling ads in China and TikTok is thought to have contributed a minor amount. However, TikTok is thought to be one of the fastest-growing parts of Bytedance’s business considering there are not that many users left to gain in China, where its apps are among the most popular in the country.

That means any valuation is likely to be decided on growth and potential rather than its current financials. It was reported that Bytedance hopes to make revenue of ¥200 billion ($28.8 billion) this year and that TikTok and its other emerging business will contribute about ¥30 billion ($4.3 billion).

The estimated value of TikTok’s global operations are wide-ranging – anywhere between $20 billion to $50 billion – and the US is thought to account for the bulk of that. A report from Reuters states investors are hoping TikTok can attain the top end of that valuation range.

But again, it depends on what countries will be included in any deal and the actual price could be very different to the vague estimates currently circulating the market.

What could TikTok sale mean for Bytedance’s valuation?

Bytedance was valued at $75 billion in 2018 after the company raised funds from investors such as SoftBank, and that was reported to have doubled from the year before. Bloomberg reported earlier this year that sales on the secondary market had pushed Bytedance’s valuation to over $100 billion.

If TikTok is sold, then Bytedance’s income will not take a dramatic hit as it currently contributes a minor amount of revenue and it will still be profitable. But it will lose its growth asset and it will be more isolated to China if TikTok – specifically designed for foreign markets – is sold or split up.

This is demonstrated by the fact some believe TikTok could account for as much as half of Bytedance’s value.

Still, Bytedance would hope to secure a premium on top of any TikTok sale to reflect the potential the app would offer to any buyer. This means it will not necessarily be a straightforward sum of deducting the TikTok sale price from Bytedance’s estimated valuation.

Bytedance will be hoping to achieve a good price from any company hoping to buy TikTok but it will be a less valuable company without it. It would undoubtedly hit Bytedance’s valuation, but it is very difficult to gauge how much value is currently attributed to TikTok.

What could TikTok sale mean for Bytedance’s IPO?

Bytedance has been rumoured to be preparing for an IPO since last year. A listing has been considered on the cards as it grew in popularity outside of China, and as a way for early investors to realise some of their investment in the company.

However, it has denied claims it is looking to list anytime soon, and recent events only throw further doubt that Bytedance will go public in the near future. The US and Hong Kong were thought to be the top destinations for any listing and the environment for Bytedance has turned sour in both countries, with the US government targeting Chinese companies and China tightening its grip in Hong Kong.

In addition, the appeal of Bytedance to foreign investors will fall without TikTok, and any money that would be raised under an IPO would likely be channelled to its growth apps like TikTok (so it wouldn’t need to do this if it no longer had TikTok). Plus, Bytedance is thought to have billions stashed away in the bank, so it doesn’t need to raise funds anyway.

Ultimately, the US ban on TikTok drastically reduces the chance Bytedance will go public soon.