Update: An official at an investment firm involved in the deal confirmed to YCBB that the merger talks are happening.
Bottom line: The merger of Dinaping an Meituan will make uneasy in-laws of Tencent and Alibaba, and will likely be followed within a year by a buyout by one of the partners or IPO for the new company.
The headlines are buzzing today with word of an imminent merger between leading group buying sites Dianping and Meituan on this first day back to work after the week-long National Day holiday. The deal is certainly a landmark one, as it will create a clear leader in the emerging category of online-to-offline (O2O) companies that bring together the convenience of Internet buying with offline products and services like restaurant dining, going to the movies and hailing a taxi.
Some media are pointing out the merger will pose a major new challenge to the aggressive O2O aspirations of Baidu (Nasdaq: BIDU), which is pouring hundreds of millions of dollars into building out its own rival services. But for me, this particular marriage represents the latest chapter of an increasingly close but also uncomfortable alliance between the country’s other 2 Internet giants, Tencent (HKEx: 700) and Alibaba (NYSE: BABA), which are major stakeholders in Dianping and Meituan, respectively.
Before we delve any further into the implications of this deal, let’s step back and review the flurry of headlines over yet another mega-merger in the Internet space. Most reports are saying a deal is imminent, and that an announcement could come as soon as Thursday, which happens to be today. (English article; Chinese article)
The reports say the new company would see Meituan receiving about 7 shares of the combined new entity for every 4 shares received by Dianping. The new company would be valued at about $15 billion. Both Dianping and Meituan were probably valued in the $5-$10 billion range after each raised its own $800 million in new funds late last year. Meituan was back in the headlines in July when media reported it was seeking another $1 billion in funds in a deal that would have reportedly valued it at $15 billion. (previous post)
All of that means that Meituan probably had to abort its July funding plan, most likely because nobody wanted to give it money based on the rich valuation it was seeking. The fact that it was returning to market so soon also indicated Meituan was probably rapidly burning through its cash as it defended its turf against an aggressive assault from Baidu, which was spending heavily on its own Nuomi group buying site and other O2O services.
Thus this marriage of Meituan and Dianping may be more of a forced union than a willing one. Such was also the case earlier this year when bitter hired car services rivals Didi and Kuaidi suddenly merged to challenge the aggressive US newcomer Uber. That case also saw Alibaba and Tencent come together, since each was a backer of one of the hired car companies.
So this latest merger would meant that Tencent and Alibaba are now uneasy in-laws for 2 of the country’s largest O2O service providers, first Didi Kuaidi and now the pending Meituan-Dianping. In one interesting and perhaps relevant footnote to the latest story, a media report says the new company will adopt a structure called VIE that is typically used by Chinese companies that list in the US. That means the merged company could be eyeing a New York IPO in the not-too-distant future, in contrast to many Chinese companies that have recently left the US in pursuit of new listings at home.
Perhaps such a listing is part of the bigger plan, as it might allow Alibaba, Tencent or possibly both to sell their stakes in the newly merged company at the time of the IPO. The fact of the matter is that Alibaba and Tencent are themselves bitter rivals, with each moving aggressively into the others’ core areas. Accordingly, I would envision trouble ahead if this pair of giants tried to co-own any major asset like Didi Kuaidi or now Meituan-Dianping. Instead, I would expect any such co-ownership to be only an interim situation before a buyout by one of the partners or perhaps an IPO that allowed both to exit.
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