Ctrip-Qunar: New Traveling Mates?

Marriage coming for Ctrip and Qunar?

The news has been flying thick and fast these past 2 few for Ctrip (Nasdaq: CTRP), including the latest word that China’s oldest and largest online travel agent could be headed for a merger with fast-rising rival Qunar (Nasdaq: QUNR). I actually predicted this potential merger last fall in the run-up to Qunar’s IPO, even though nothing happened at that time. Now the latest reports are saying such a deal is in late-stage talks as Ctrip prepares to sell a controlling stake of itself to leading search engine Baidu (Nasdaq: BIDU), which also happens to be Qunar’s controlling stakeholder.

The sourcing in this new report is even sketchier than usual for Chinese media; but the report’s appearance on the reputable Sina news website gives it a bit more credibility. (Chinese article) According to the report, Baidu would buy control of Ctrip, and then use its similar control of Qunar to merge of the pair. That would create a clear industry leader with a market value of about $10 billion, combining Ctrip’s market cap of about $7 billion with Qunar’s $3 billion. By comparison, eLong (Nasdaq: LONG), the industry’s only other major listed player, has a far more modest market value of just $550 million.

Ctrip has been one of my favorite Chinese web companies for a while now, due to its ability to focus on its core travel services while adding well-conceived new products that complement that strength. For years the company’s main rival was eLong, which never seemed able to match Ctrip’s performance despite its backing by US travel services giant Expedia (Nasdaq: EXPE).

But the last 2 years have seen the arrival of a new field of more nimble competitors, led by names like Qunar, Tongcheng and Tuniu. Ctrip and Qunar fought a bruising price war in the first half of last year, but the tensions eased in the second half. That easing culminated in a surprising tie-up last fall that saw Ctrip start marketing some of Qunar’s products, leading me to predict that Ctrip could become a major strategic investor in Quanr’s  IPO that came in November. (previous post)

Further signs emerged of a potential strategic tie-up after Ctrip raised a hefty $800 million through a convertible bond offering last fall, bringing its total cash pile to $2 billion at the end of 2013. But no strategic investment ever came, and last week Ctrip again surprised the market by announcing a program to buy back up to $600 million in shares. (previous post) That announcement came after a brief period of weakness in Ctrip’s stock, after the company became embroiled in a scandal where some of its users’ credit card data was compromised.

With all that recent history in mind, what’s a person to make of the latest reports of a merger? Despite the shaky sourcing on the report, I would stand by my previous prediction that a merger makes sense and is quite likely to happen. Ctrip and Qunar have already shown they can work together, and savvy managers at both companies realize they can do much better together than separately. Having a major company like Baidu as their strategic parent must also be attractive.

The biggest danger could be regulatory scrutiny, as Ctrip and Qunar are already easily the 2 largest players in the online travel space. China’s regulator has so far taken a hands-off approach to the rapidly consolidating Internet sector, and may decide to maintain that stance if a Ctrip-Qunar deal is announced. But there’s always the chance it could decide to slow down the recent pace of consolidation, which could result in a veto that would undermine both Ctrip and Qunar’s stocks.

Bottom line: A combination of Ctrip and Qunar could be coming with Baidu as the new company’s controlling stakeholder, though the deal could get vetoed by China’s anti-monopoly regulator.

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