TRAVEL: Bidding War Coming For eLong with Tencent Offer?

Bottom line: Ctrip is likely to make a counter-bid for eLong following a surprise offer from Tencent, sparking a potential bidding war that should ultimately see Ctrip emerge as the victor.

Tencent launches surprise bid for eLong

I’ve been predicting for the last few months that leading online travel site Ctrip (Nasdaq: CTRP) would make a buyout bid for former rival eLong (Nasdaq: LONG), so I was quite surprised to read that such a bid has come instead from Internet giant Tencent (HKEx: 700). This particular move is all the stranger because Tencent hasn’t shown much interest in the travel sector before now, though it previously invested in eLong and now owns about 15 percent of the company.

I also have to suspect that this particular bid came without the knowledge of Ctrip, which itself owns 37 percent of eLong. Ctrip got its stake after joining a group that bought out a controlling 62 percent of eLong previously held by US travel giant Expedia (Nasdaq: EXPE) earlier this year. Tencent has owned its stake in eLong since 2011. Ctrip’s recent moves have all pointed to its own buyout offer for eLong, leading me to believe that we could quickly see a bidding war break out for the company.

Investors weren’t convinced that such a bidding war is coming, though they did get quite excited about the Tencent offer. eLong’s stock jumped 20 percent after it announced it had received the offer, though the shares still closed below the actual offer price. If investors were expecting a bidding war, we probably should have seen the shares jump above the offer price.

More broadly speaking, this latest buyout offer is part of a bigger wave of similar deals that have seen dozens of US-listed Chinese companies launch privatization bids this year. Most of those companies have failed to attract interest from US investors, and their shares have languished as a result. Many feel they could get better valuations in China, and are trying to de-list from the US and eventually re-list at home.

The case with eLong is similar, since the stock never did very well and has lost nearly half of its value since the Ctrip-led buyout of Expedia’s stake back in May. According to eLong, Tencent has now offered to buy all of its shares for $18 each, representing a 27 premium over their last closing price. (company announcement; Chinese article) But that price still represents a discount from the peak of more than $22 that eLong reached back in May when the earlier Expedia buyout was announced.

eLong’s other major stakeholders include 3 other hotel services companies, Keystone Lodging, Plateno Group and Luxuriant Holdings, which collectively hold about a quarter of eLong’s shares. That means that trio of companies, together with stakeholders of the remaining 20 percent of eLong’s shares, could ultimately decide the company’s fate.

Unclear Strategy

Frankly speaking, I’m still not sure what Tencent’s strategy is with this buyout offer. Tencent has owned its 15 percent of eLong for 4 years now, and was also one of several companies to invest in online travel site Tongcheng when it raised 6 billion yuan in a new funding round last month. (previous post) Perhaps Tencent is hoping to buy out Tongcheng also and combine it with eLong to create a new competitor to Ctrip and Baidu-backed (Nasdaq: BIDU) Qunar (Nasdaq: QUNR).

At the same time, it’s clear that this buyout offer will have a hard time succeeding without Ctrip’s agreement, since Ctrip owns 37 percent of eLong. That means it’s possible Ctrip is cooperating on this particular buyout offer, though we’ve seen no indication of that in any of the announcements or reports so far.

My previous predictions of a Ctrip buyout for eLong were based on its 37 percent stake purchase, plus a number of other new recent tie-ups. The latest of those saw a former Ctrip executive recently leave to become eLong’s new CEO. (previous post) Both Ctrip and Tencent are quite cash rich and could easily buy eLong. The determining factor will be who wants eLong more, and I do think Ctrip is likely to make a counter-bid for eLong and ultimately emerge as the winner.

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