China’s two largest online video companies will combine, aiming to create a profitable market leader in the fast-growing but fiercely competitive industry.

Youku and Tudou, both listed in the US, said yesterday they had signed a definitive agreement under which Youku would be the surviving entity in an all-share transaction. Youku’s shareholders will own 71.5 per cent of the combined company, and Tudou shareholders 28.5 per cent.

Valued at $1.04bn, it is China’s biggest internet-industry deal via a stock swap agreement, according to Thomson Reuters. The agreement comes as both companies are struggling with continuing losses because the cost of acquiring and producing content, and beefing up their infrastructure to ensure faster streaming speeds is outpacing the increase in advertising revenue.