When so much news centers around companies going public, it is sometimes hard to notice when companies do the opposite. Going private often occurs when the entire stock of a publicly traded company is acquired by a private equity firm or multiple firms. Today brought an example of exactly that as Chinese DouYu International Holdings (NASDAQ:DOYU) announced that it would be going private. Furthermore, entertainment conglomerate Tencent Holdings (OTCMKTS:TCEHY) is behind the move. DOYU stock has reacted very well to the news, and so far it has been good for TCEHY as well.
What’s Happening With DOYU Stock
The announcement of this pending deal sent DOYU stock shooting up this morning. A previously overlooked penny stock, DOYU plunged last Friday, but following today’s gains, it is in the green. Indeed, it slid 4% as markets opened today but was quick to rebound. As of this writing, it is up almost 14% for the day. It’s up by more than 2% for the week and almost 3% for the month. However, DOYU stock was trading at more than $4 per share less than six months ago and is still at only $2.50.
Tencent is also rising today, though its pattern has been one of turbulence. As of this writing, it is up 0.18% for the day but remains in the red for the week by just under 1.5%. In 2021, the company faced some regulatory hurdles when its merger with fellow Chinese game producer Huya (NYSE:HUYA) was blocked on antirust grounds.
Why It Matters
Tencent was likely to expand its stake in DouYu following that incident. That type of merger would have placed it solidly in the lead of China’s gaming race. The previous year was marked by regulatory trends that threatened China’s gaming sector, but companies have been working hard to rise above these constraints. For Tencent, this means finding new expansion tactics, such as increasing its stake in smaller gaming companies, like DouYu.
According to Nikkei Asia, Tencent was already the largest shareholder in DouYu with a 37% stake. It is currently in talks with investment banking institutions to find the partner it needs to acquire the remaining shares. According to anonymous company sources, the move to go private is a reflection of Tencent’s desire to “have a firm grip on its core gaming affiliates at a time when it faces a raft of regulatory issues.”
That certainly seems to be the case. As of now, this deal is a mutually beneficial agreement for both parties. It has sent DOYU stock up and provided Tencent with the platform extension that it needs. This comes at a good time. Late in 2021, China’s government granted authorization to the company to continue publishing updates.
What It Means
Tencent is also exploring aspects of the metaverse. We know there’s plenty of potential in that area, and the company’s gaming tech holdings will only prove beneficial as it ventures into this highly profitable area of gaming.
With Chinese gaming companies, the threat of regulatory action is never far away. That said, Tencent’s track record with its government is pretty good. If nothing changes on that front, there’s no reason taking DOYU stock private won’t prove to be an excellent decision for Tencent.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.