Tencent, Jingdong In Rumored Tie-Up Talks

Jingdong in rumored tie-up talks with Tencent

Just a week after I speculated that a tie-up could be coming between e-commerce sites Jingdong and Dangdang (NYSE: DANG), a new report is saying a similar partnership could be forming between Jingding and leading Internet firm Tencent (HKEx: 700). Sourcing for this latest report isn’t too solid, so I’m far from certain that these talks are really happening. But regardless of the actual situation, the news highlights the fact that the highly competitive e-commerce sector is sorely in need of consolidation and that whoever makes the first moves could have the best chances of long-term survival.

The latest report on the private equity news site pedaily.com doesn’t have much detail, and cites an unnamed source simply saying that Tencent is in negotiations to invest in Jingdong. (English articleChinese article) The vague sourcing and lack of detail makes me believe there’s only a 50-50 chance that this report is true, though it certainly makes sense and could be a shrewd move for both Tencent and Jingdong, China’s second largest e-commerce company behind sector titan Alibaba.

After maintaining a low profile for most of 2013, Jingdong has been in the news nonstop since the end of the year following the return of talkative CEO Liu Qiangdong to China after a year of study in the US. Most of the talk has centered on Jingdong’s long-delayed plans for an IPO, most likely in New York. Signs have pointed to an offering sometime next year, as Jingdong looks to raise $1 billion or more, with the company scrambling to make its listing before another highly anticipated IPO by Alibaba also sometime in the year.

More recently, comments about the Jingdong IPO by Dangdang Chief Executive Li Guoqing led me to speculate that those 2 companies could be headed towards their own tie-up, kicking off some consolidation. (previous post) Such a tie-up would combine 2 companies that are currently close to or just breaking even, accelerating their drive into the elusive profit column. Among the sector’s many major players, only Alibaba is believed to be operating profitably.

A Jingdong-Tencent combination would look similar to the potential Jingdong-Dangdang tie-up. In that case, Jingdong could combine with Tencent’s fast-growing but money losing Yixun e-commerce service. Cash-rich Tencent has been aggressively promoting Yixin for the last year, after its relatively late arrival to the e-commerce sector.

Dangdang, Tencent, Jingdong and Alibaba are 4 of China’s top domestic e-commerce firms, with Suning (Shenzhen: 002024) also a major player. Those companies are joined by global rivals Amazon (Nasdaq: AMZN) and Walmart’s (NYSE: WMT) Yihaodian, creating a very crowded field in the fast-growing but highly competitive market. Among all those players, Jingdong and Dangdang look like the 2 most likely candidates for consolidation since neither has a cash-rich parent that can indefinitely subsidize its expansion.

So, what do I think of this potential Jingdong-Tencent tie-up? Frankly speaking, I think it would be quite a smart move for both companies. Tencent has already established itself as China’s leading social networking (SNS) and online game company, and doesn’t need to stretch its resources further by straying too far out of its comfort zone into e-commerce. Meantime, Jingdong really does need to quickly gain some scale to pose a serious challenge to Alibaba, and could quickly gain such scale through a combination with Yixin.

The new year is still young, so we’ll have to see if any new reports emerge in the next few weeks to give more credence to this new Jingdong-Tencent tie-up rumor. But regardless of what happens in this particular case, it does seem clear that we’re likely to see more reports of similar talks throughout the year, and I would expect we could see at least one major deal before 2014 ends.

Bottom line: A rumored potential tie-up between Jingdong and Tencent looks logical and would represent a smart move by both firms, kicking off consolidation in China’s e-commerce space.

Related posts:

(Visited 88 times, 1 visits today)