(Bloomberg) -- China Literature Ltd., the e-books business spun off by Tencent Holdings Ltd., tumbled the most since its initial public offering after agreeing to buy New Classics Media from its controlling shareholder for as much as 15.5 billion yuan ($2.3 billion).

Shanghai-based China Literature fell as much as 13 percent, the most since its November offering. The company will pay for the deal in cash and new shares issued to New Classics senior management team and Tencent, according to a statement on Monday. The final price will be subject to an earn out mechanism which only has a possible downward adjustment if earnings fall below certain levels, it said.

The deal is aimed at adding popular TV programs and movies to China Literature’s content offerings, including the series “The First Half of My Life” and films such as “Some Like it Hot.” But some analysts expressed skepticism about the deal’s benefits., seeing it as a quick-fix way to boost growth.

"They’re having trouble growing paying users, the core business is slowing down," said Billy Leung, an analyst with Haitong International Securities Co. in Hong Kong. "What they’re doing is trying to get growth by buying a production business."

China Literature’s management defended the deal, arguing that it had promising synergies and a payout pegged to performance metrics. It’s the first deal by China Literature since its blockbuster IPO that raised more than $1 billion and saw the stock jump 86 percent on debut.

“New Classics Media is a perfect fit for our strategy,” said Liang Xiaodong, co-chief executive officer, in a conference call. “We feel the strategic value of this acquisition, it’s clear, but more importantly, we had to structure the deal in a right way that aligns the long-term interest of shareholders, for both sides.”

Tencent owns about 44 percent of the company on a fully diluted basis, while New Classics management owns the remaining 56 percent of the equity capital, China Literature said.

China Literature said it would fund the transaction with 5.1 billion yuan of cash and 10.4 billion yuan in stock. Bank of America Merrill Lynch was the exclusive financial adviser on the deal.

China Literature owns nine major branded products and its flagship is QQ Reading, a mobile aggregation and distribution platform, it said. Tencent distributes China Literature across a number of its products, including Tencent News and Weixin Reading.

The company’s content is also distributed beyond its controlling shareholder Tencent by pre-installing apps on smartphone partners including Oppo, Vivo and Huawei.

To contact the reporter on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Peter Elstrom

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