FUND RAISING: O2O Wars Drive Meituan Back to Market

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Bottom line: Intensifying competition in dining-related O2O services is pressuring Meituan to raise more funds, and the company should seriously consider a strategic alliance with Alibaba.

O2O dining wars dog Meituan

Online-to-offline (O2O) services have become the flavor of the day on China’s Internet, and take-out dining has emerged at the epicenter of a stampede by all 3 of China’s leading Internet companies to develop the market. Over the last 2 years, leading search company Baidu (Nasdaq: BIDU), e-commerce leader Alibaba (NYSE: BABA) and social networking giant Tencent (HKEx: 700) have all launched major initiatives in the space, collectively pouring hundreds of millions of dollars into the area.

Against that backdrop, the independent Meituan is emerging as an orphan in the space, since it’s the only player without a major backer despite its status as China’s top group buying site. That could explain the latest reports that say Meituan has returned to financial markets and is in the process of raising up to $2 billion in new funds, less than a year after it raised $700 million in another massive cash-raising exercise.

This latest fund-raising would come less than 2 months after Meituan’s CEO Wang Xing denied talk that his company was seeking new funds and repeated his earlier assessment that Meituan was in no hurry to make an IPO. (previous post) But it’s obvious that the company is feeling pressure from all the recent moves by the other big Internet companies, which could ultimately force it to look for its own rich benefactor.

According to the latest reports, talks are already in the late stages for Meituan’s latest fund-raising round. (Chinese article) That means CEO Wang was almost certainly lying when he denied back in July that such a deal was in the works. But as someone who has covered China’s corporate scene for more than a decade, I’ve learned that such denials are usually meaningless, and are really the equivalent of a “no comment” by a western CEO.

But returning to the news, the new reports say at least 20 domestic and international investors are lining up for this latest mega-funding, which is likely to raise $1.5 billion to $2 billion, showing there’s still plenty of demand to buy into Meituan. But the same reports also point out that such a massive funding after Meituan raised $700 million at the start of this year also shows the company is rapidly burning through its cash due to stiff competition in China’s market for O2O services.

Chasing Diners

Frankly speaking, I do see big difficulties for Meituan due to the suddenly heated competition in the market if it really wants to remain independent. Tencent was the first of China’s big 3 Internet companies to begin chasing the group buying and take-out dining markets with its purchase last year of 20 percent of Dianping, often called China’s equivalent of Yelp (NYSE: YLP).

Baidu has also discovered the space over the last 2 years through its purchase of group buying site Nuomi and more recently its newer commitment to spend aggressively on O2O take-out dining services. Baidu said in July it would spend 20 billion yuan to build up Nuomi, with an aim to overtaking Dianping and Meituan over the next 3 years. (previous post) More recently Baidu also said it would spend another $200 million to build up its own take-out dining service. (previous post)

Lastly there’s Alibaba, which is the least developed in this O2O dining race and is placing bets on its service called Koubei, which has existed for several years but was never strongly promoted. Most recently media reported that Alibaba would spend 5 billion yuan ($780 million) on offline merchants to develop Koubei this year.

But that said, a more interesting prospect that I could envision would see Alibaba instead put its O2O dining efforts into a tie-up with Meituan. Alibaba was already one of Meituan’s early investors, and a stronger tie-up could help it to quickly catch up with Tencent and Baidu in the hotly contested area. Accordingly, I would advise Meituan to seriously consider a bigger tie-up with Alibaba in its latest fund-raising round.

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