Ctrip-Qunar Tie-Up: Merger Ahead?

Ctrip promotes packages on Qunar

Local media have been buzzing this week with word of a new alliance between the unlikely partners of Ctrip (Nasdaq: CTRP) and Qunar, 2 of China’s top online travel sites. The new alliance is actually rather modest, but is more surprising because the pair of companies are bitter rivals whose battle for market share has resulted in a recent series of price wars that have hit Ctrip’s earnings and threatened its market leading position. The companies have also said they will explore future cooperation, leading to the question of whether an outright merger might be in the future. 

Before we look at the merger question, let’s take a look at the news that saw Ctrip formally start offering some of its vacation packages over Qunar’s platform over the weekend. (English article) The companies said the initial tie-up is limited to vacation packages, but that they are negotiating additional cooperation in the airplane ticket and hotel room booking areas. The tie-up came as a surprise due to the fiercely competitive relationship between the 2 firms, which has even included Qunar lawsuits in 2011 and 2012 against Ctrip over allegations of deceptive business practices and defamation.

Ctrip shareholders weren’t too impressed by the news, with the company’s New York-listed stock falling 1.7 percent after word of the tie-up came out. But the shares have already rallied sharply last week after Ctrip reported strong earnings, including a 76 percent jump in quarterly profit. (company announcement) Ctrip shares reached an 18 month high after the results came out, and are now trading near their levels from before an investor confidence crisis that has dogged US-listed Chinese shares for the last 2 years.

Ctrip and Qunar use different business model, allowing Qunar to make major inroads to the market despite its relatively recent arrival. Ctrip’s model is relatively conventional, with the company directly offering hotel and airline bookings to customers. Qunar, by comparison, doesn’t sell directly to travelers and instead operates a platform where third-party travel agents can set up shops. Qunar’s model allows users to compare prices between many different travel agents, often allowing them to get lower prices than they might be able to find on Ctrip.

Thus it’s easy to see how Ctrip and Qunar’s businesses are somewhat complementary, and how these 2 companies might be able to combine to form a potent major online travel agent. Such a deal would be relatively affordable for Ctrip, since recent media reports indicate Qunar is probably valued in the $1-2 billion range. Ctrip’s latest market value stands at about $5.5 billion, and the company now has about $1.1 billion in cash and cash equivalents on hand, according to its latest report.

Despite the logic of a deal, I do think that the chances for such a merger are limited for a number of reasons. Neither Ctrip nor Qunar has a great reputation for the kind of cooperation that would typically lead to a friendly merger, as reflected by the previous animosity between the companies. Ctrip previously sold a major stake of itself to Japan’s Rakuten (Tokyo: 4755), but Rakuten ended up selling the stake several years later after failing to get any synergies from the deal.

Meantime, Qunar is controlled by leading search engine Baidu (Nasdaq: BIDU), which made purchased its stake as part of its recent bid to diversify beyond its core search business. Baidu is hardly in need of cash, as it has raised $2.5 billion through 2 major bond offerings since late last year. Thus I doubt Baidu would want to sell its Qunar stake, which would be a necessary step for any merger. While a tie-up is still possible, perhaps with Baidu as a major stakeholder in the merged company, I would put the chances of such a pairing relatively low, at just 10-20 percent.

Bottom line: A merger between Ctrip and Qunar makes strategic sense, but looks unlikely for a number of company-specific issues.

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