HONG KONG?Chinese internet giant Tencent Holdings Ltd. has agreed to acquire a controlling stake in China's leading music-streaming company in a deal that values the firm, China Music Corp., at roughly $2.7 billion and creates a dominant player in China's online-music market, people familiar with the matter said.
Tencent, China's biggest social-networking and online-games company, which also runs its own music-streaming service, will boost its stake in China Music to about 60% from 16%, one of the people said.
The deal turns Tencent into a clear market leader in China's online-music market, as it brings together the country's top-three mobile music applications owned by the two companies. CMC owns Kugou and Kuwo, while Tencent operates QQ Music. Kugou is the largest mobile music service in China with a 28% market share, followed by QQ Music's 15% and Kuwo's 13%, according to data from research firm iiMedia Research.
In the first quarter, China's mobile-music services had 449 million users, more than the entire population of the U.S., making it the world's largest market by the number of users, according to iiMedia.
Tencent plans to combine the team operating QQ Music with CMC, the people said. The combined music businesses will be valued at around $6 billion after the deal is completed and will operate as a subsidiary of Tencent, the people said.
CMC had been planning an initial public offering in the U.S. before agreeing to be bought by Tencent. That plan has now been put on hold, the people said.
The Wall Street Journal reported in May that CMC was working with Goldman Sachs Group Inc. and Morgan Stanley for an IPO that was expected to happen later this year. Although the amount of funds CMC was expected to raise had not been decided at the time, some people familiar with the matter expected it to be between $300 million and $600 million.
Tencent could pursue an IPO of the combined company in the future, one of the people said.
Online entertainment, such as music and movies, has become a major battleground for China's biggest internet companies such as Tencent, Alibaba Group Holding Ltd. and Baidu Inc.
Those companies have been signing licensing deals to distribute more songs and movies through their platforms. Tencent, for example, has secured deals with Sony Music Entertainment and Warner Music to become their exclusive online distributor in China.
Tencent has been trying to persuade users of its QQ Music, which streams most songs for free, to pay for a premium membership that offers perks such as an extended music library, higher-quality sound and members-only concerts at a small monthly fee.
"The obvious downside of this is the whitewashing of a once tentatively competitive marketplace, the upside being that it gives Tencent the necessary clout to drive the market into a paid model, a process which has been faltering as of late," Mr. Peto said.
Write to Alec Macfarlane at Alec.Macfarlane@wsj.com and Juro Osawa at email@example.com