Snap (SNAP) and Tencent (0700:HK)

Yesterday, as part of its disappointing quarterly earnings announcement, SNAP revealed that Chinese internet giant Tencent has acquired a 12% stake in the company.

This is considerably less than it seems, however, for three reasons:

–US securities law requires that an acquirer make a filing–called a 13D–declaring its intentions once it has built a 5% voting interest in a publicly traded company.  It must also report every +/- 0.5% change in its ownership interest as long as the total holding remains at 5% or above.  Based on this rule, a quick reading of the Tencent headline suggests the Tencent move up came in at least one large chunk and fairly recently.  Not in this case, however.  SNAP has issued only non-voting shares.  So the SEC filing requirement doesn’t apply.  In fact, Tencent says it has acquired the stock in the open market over a lengthy period.  Therefore, the 12% stake is not a this-week vote of confidence by Tencent in the SNAP management.

–the stake was acquired in the open market, not from SNAP directly.  Therefore, the large amount of money Tencent spent on SNAP shares did not go into the company’s coffers.  It went to third-party holders exiting their positions.  So, yes, Tencent took out sellers who might otherwise have put downward pressure on SNAP’s share price.  But SNAP did not receive the benefit of a substantial cash injection.

–also, the fact that these were open market transactions does not signal the strong commitment to SNAP that a direct purchase of a block of shares from SNAP would have.  Tencent could disappear from the share register just as easily as it appeared.