Ground down by CFIUS

Zhou Yahui: forced seller

In 2016 Barack Obama was resident in the White House. Sino-US relations were better than today but Washington still blocked a number deals backed by Chinese investors.

Blackstone called off the sale of Hotel del Coronado in California – a transaction said to be worth about $1 billion – to Anbang Insurance because the Committee on Foreign Investment in the United States (CFIUS) said the premises was too close to a naval base.

In early 2016 the Americans also blocked Philips’ plan to sell its lighting business for $3.3 billion to a group backed by Chinese funds such as GSR Ventures – also on national security concerns.

One smaller deal did get through, though: Beijing Kunlun Tech’s $93 million purchase of a 60% stake in Grindr, a gay dating app. The acquisition was announced in January 2016. The Shenzhen-listed gaming and investment firm then spent another $152 million to buy the rest of Grindr, valuing it at $400 million.

Kunlun’s ownership is now under review as the Grindr deal has come under scrutiny retrospectively.

“We are in talks with CFIUS at the moment. We have not reached any agreement with CFIUS as of the day of the announcement. We will disclose any future development,” Kunlun said in a brief filing with the Shenzhen stock exchange.

When the Chinese firm took control of Grindr three years ago, very few concerns were raised – at least in the media. Newspapers like the Los Angeles Times focused instead on Grindr’s growing international appeal and how its new owner might help the LA-based matching app expand in China.

But when Kunlun completed its full buyout early last year, the Washington Post reported that American intelligence officials had started to take an interest, worried about security protections for Grindr’s data.

US legislators also began to delve into Grindr’s data privacy policies, demanding answers as to how the app intended to protect its 40 million registered users across more than 200 countries.

CFIUS has not made public its concerns. But like other social networking companies, Grindr keeps a lot of data on its customers, which presumably will include US officials or government contractors who media have speculated could be blackmailed or compromised.

Last year CFIUS was instrumental in blocking a proposed merger between MoneyGram and the Chinese firm Ant Financial, also apparently over data privacy concerns (see WiC393).

The most important ramification of the current case, according to Reuters, is that the intervention from CFIUS indicates its readiness to undo China-backed acquisitions that have already been completed (a precedent which will make some acquisitive Chinese CEOs very nervous).

One reason why CFIUS has acted, Reuters says, is that Kunlun never submitted its takeover of Grindr for review at the time of either the first or second tranche of the deal.

Kunlun started out as an online gaming firm but in recent years it has morphed more into tech-focused private equity investing. Kunlun had earlier planned an IPO for Grindr, Beijing News reports. But its boss Zhou Yahui (see WIC325) is now preparing for a forced sale of the dating app just a year after he completed its acquisition.

One valuation benchmark for a sale could be Blued, which is the largest same-sex dating app in China. It was valued at about $500 million in a fundraising round early last year. Financial news portal iHeima reported that Blued had about 40 million register users back then, with more than 70% of them from China. Grindr is much more global in its customer base, with only 30% of its users from the US.

Since being acquired Grindr hasn’t made much progress in the Chinese market. Partly this is because the Chinese government is hostile to internationally-based dating apps. Another important reason, iHeima noted, is that the sector is already pretty crowded – there are similar matching apps, some of which have gone bust in recent years.

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