TRAVEL: Ctrip Gets Cozier with eLong, Merger Coming?

Bottom line: The move by a Ctrip vice president to the role of CEO at eLong represents growing ties between the 2 companies, with the former likely to make a buyout offer for the latter within the next year.

Ctrip exec takes over at eLong

A new executive move between online travel leader Ctrip (Nasdaq: CTRP) and the smaller eLong (Nasdaq: LONG) shows the pair of former rivals are moving closer together, hinting at a potential outright merger in the not-too-distant future. Such a merger would have been major news just 5 years ago, when this pair of companies were the 2 clear leaders in China’s online travel sector.

Since then, however, eLong has sputtered under the ownership of US travel giant Expedia (Nasdaq: EXPE), which finally called it quits in May and sold its stake in the Chinese company. (previous post) Ctrip was quick to jump in and purchase 37 percent of eLong for $400 million, and has now moved even closer to its former rival with this new executive move.

The actual move has former Ctrip vice president Jiang Hao taking up the title of CEO at eLong. (company announcement; Chinese article) The move turbocharged eLong’s stock, which shot up 18 percent amid a broader rally for US-listed Chinese shares in the latest trading session. Such a big jump almost certainly reflects investor hopes that Ctrip will ultimately offer to buy all of eLong.

eLong currently has a market value of just $540 million following the rally in its shares, even though Ctrip paid $400 million for just a third of the company 2 months ago. The company’s shares lost nearly half of their value between the time of the original Expedia sale and this latest executive announcement, amid a broader plunge in US-listed Chinese stocks in tandem with a larger sell-off on China’s domestic stock markets.

China’s online travel market has undergone major changes since Ctrip and eLong emerged as the industry’s 2 early leaders about a decade ago. While Ctrip has maintained its status as the industry leader, eLong slowly slipped into obscurity under Expedia’s ownership. At the same time, a newer generation of more aggressive firms rose to prominence, led by aggressive newcomer Qunar (Nasdaq: QUNR), which is backed by the cash-rich Baidu (Nasdaq: BIDU).

Growing Ties

All that brings us back to the growing coziness between Ctrip and eLong with this latest executive move, which isn’t too surprising since Ctrip is now eLong’s controlling shareholder. Other investors who purchased stakes at the time of the Expedia sale are also in the lodging space, including Keystone Lodging Holdings, Plateno Group and Luxuriant Holdings Ltd.

At eLong’s current market value, Ctrip could easily buy out its partners for a relatively modest $340 million, or perhaps as much as $400 million if it offers a premium for the stock. Ctrip is currently quite cash rich and has plenty of access to additional credit, which allowed it to raise $1.1 billion through a new bond offer last month. (previous post) It has previously invested in many of the industry’s other newer companies like Tuniu (Nasdaq: TOUR) and Tongcheng, and even approached Qunar about a merger but was rebuffed.

The bigger question is whether eLong is even worth Ctrip’s trouble, since this is a company that long ago ceased to be a major industry player. Obviously Ctrip feels the answer to that question is “yes”, based on its recent investments. eLong’s revenues totaled a modest 225 million yuan ($36 million) in its latest reporting quarter, which is about a tenth of what Ctrip now brings in.

That means an acquisition could immediately add 10 percent to Ctrip’s top line, which isn’t huge but is still significant. The problem is that eLong’s revenue grew just 14 percent in its latest quarter, compared with 46 percent growth for Ctrip. Boosting that lackluster growth will almost certainly be a top priority for Jiang Hao in his new role as CEO. If he can show some early signs of success on that front, I wouldn’t be surprised to see Ctrip offer to buy the company outright within the next year.

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