Bottom line: Alibaba could take control of Ele.me after the latter’s latest fund-raising, and then make a bid for Baidu’s take-out dining service, leaving just two major players in the sector as it nears a more sustainable state.
The take-out dining wars have taken another interesting twist, with word that one of the oldest players, Ele.me, is on the cusp of raising a fresh $1 billion in new funds. What’s interesting about this latest fund raising is that it’s being led by Alibaba (NYSE: BABA), which is also trying to carve out a niche in the market through its own Koubei take-out delivery service. But even more intriguing is the possibility that this new funding could be aimed at giving Ele.me the firepower it needs to buy out Baidu’s (Nasdaq: BIDU) take-out delivery service, which is reportedly being shopped by the country’s leading search engine.
There are many threads to this story, but the bottom line is an end game is slowly coming into sight for China’s take-out delivery business, following the typical boom period we often see for this kind of emerging sector. The current field of take-out dining services is dominated by three names, Alibaba-backed Ele.me, Tencent-backed (HKEx: 700) Meituan-Dianping and Baidu take-out.
We had one interesting development a couple of weeks ago, when one of the oldest players, the niche-oriented Sherpas that originally focused on the expat community, was purchased by KFC’s China affiliate Yum China (NYSE: YUMC). (previous post) More on that shortly, including how the new Yum China-backed Sherpas might fit into the final overall takeout dining equation.
But first let’s return to the latest headlines, that say Ele.me is close to landing a new round of at least $1 billion, in a funding that would value the company at between $5.5 billion and $6 billion. (English article) If we do a little math, that means the buyers would be getting about 17 percent of the company for this investment. That’s significant because Alibaba already owns about a third of Ele.me, meaning its ownership of the company could rise to as much as half or more following this new investment round.
Industry watchers might recall that Alibaba reportedly tried to buy Ele.me outright early last year, but was rebuffed by the company, China’s earliest mass-market entrant to the fiercely competitive sector. But much has changed in the nearly year and a half since then, most notably the fact that the three remaining big players continue to burn though big cash with no real end in sight to the rampant competition.
It’s quite well known by now that Baidu is no longer interested in the space, and one of my sources told me it eliminated its marketing budget for the service this year and is rapidly reducing its squadron of deliverymen. It’s also widely believed that Baidu is shopping the unit for sale to anyone who will take it, but isn’t getting much interest.
Alibaba Swallowing Ele.me?
In that context, this newest development from Ele.me has some interesting overtones for the industry’s potential end-game. Put simply, Alibaba would become Ele.me’s largest stakeholder with a potentially majority stake following this latest funding. That funding, in turn, would probably provide more than enough funds to buy Baidu’s take-out delivery service, which Baidu would probably be willing to sell for between $500 million and $1 billion.
All of that brings us to the prospect that Ele.me could complete this latest funding, and then swallow Baidu as well as Alibaba’s Koubei to create a clear leading player in the market. That would leave the only other major player as Meituan-Dianping, which has recently said it is breaking even after some reports emerged that it was still losing big money.
At the end of the day, I still question whether the market is big enough for two major players of Ele.me’s and Meituan-Dianping’s size, with Sherpas perhaps emerging as a niche player focused on higher-end fare. But two major players is certainly more sustainable than three, and I do suspect there’s plenty of room for both Ele.me and Meituan-Dianping to scale back their take-out dining businesses to more sustainable levels to find a long-term formulas for profits.