The proposed merger of the two Twitch-like livestreaming platforms in China, DouYu International Holdings Ltd. and HUYA Inc., will see lower content acquisition cost and strengthen Tencent Holdings Ltd.'s dominance in the online gaming sector in China, analysts said.

Tencent will hold 67.5% on a fully diluted basis in the combined company, making it the largest shareholder. It currently owns a 37% stake in Huya and a 38% stake in Douyu.

Huya agreed to acquire all outstanding shares of DouYu via a stock-for-stock merger, according to an Oct. 12 announcement. Upon completion of the merger, Huya and DouYu's shareholders will each hold about 50% shares of the combined company on a fully diluted basis. In addition, DouYu will become a privately held and wholly owned subsidiary of Huya.

"The merger definitely creates a situation with a key player owning the majority of the revenue and traffic in the market," Benjamin Cavender, managing director at China Market Research Group said.

Huya, DouYu and Tencent's live-streaming branch Penguin esports, together accounted for nearly 86% of the game live-streaming market of China, based on the number of active users as of March 2020, according to data compiled by MobTech.

Huya posted 168.5 million monthly active users in the April-to-June period of 2020, while DouYu had 165.3 million users during the same period.

Meanwhile, Huya earned 5.11 billion Chinese yuan in the first six months of 2020, while DouYu earned 4.79 billion yuan. The size of the gaming livestreaming market of China was estimated to be 10.6 billion Chinese yuan in 2019, according to a December 2019 research by Gamma Data.

"The instant benefits would be on the cost side," Vincent Yu, senior research analyst at Needham & Company, said. The merger would make it easier for the combined company to attract popular streamers, he said.

The deal would also boost user engagement, according to a research report from Thomas Chong, an equity analyst at Jefferies. The streaming platforms will be able to access more engagement data and user preference, he said.

Tencent, which develops most of the top games on the platforms, will have increased penetration in the gaming market. The company is building a "supply-chain of e-sports services moat" for the ecosystem, Needham's Yu said. Owning the largest video streaming platform will increase the visibility of Tencent's gaming offerings, the analyst said.

Benefits aside, the deal is expected to face close regulatory scrutiny.

The size of the merger means it needs approval from the Chinese Ministry of Commerce, according to the recently updated guidance by the Ministry of Justice of China.

A potential concern is whether the merger would result in the streaming platforms favoring Tencent offerings over games developed by Tencent competitors.

It is possible that "the merger will monopolize the esports live-streaming platforms," Tam Tsz Wang, equity analyst of DBS Vickers Securities, said. But "the market is very fluid ... you are not sure [if] the second and third largest players bring in new competition soon," he added.

Beijing Byte Dance Telecommunications Co. Ltd., which owns short-video apps including Douyin, Huoshan and TikTok, has been beefing up its games offering since the beginning of this year. The company has trialed various new games and livestreaming of games.

"ByteDance will probably see [the merger] as a challenge but also as an opportunity," Cavender said. "Mergers do not always go well and in this case may open the door for a nimble competitor to be creative about coming out with a better offering."