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Chinese online groups agree merger in deal worth up to $20bn

Chinese online groups agree merger in deal worth up to $20bnTwo of China’s largest online companies have agreed to combine in what will be the country’s largest private market merger, with a potential valuation of as much as $20bn, The Financial Times reported.

By coming together, Meituan.com and Dianping Holdings would dominate in China’s market for providing everything from film tickets to discount restaurant coupons and home delivery of food.

Meituan, a group-buying site similar to Groupon, had about 52 per cent of the Rmb77bn ($12.1bn) online-to-offline services market in the first half of the year, according to researcher Analysys International, while restaurant review app Dianping accounted for about 30 per cent.

The combined group would pose a greater threat to other established players, notably search engine Baidu’s consumer services platform Nuomi. Baidu in June said it would invest Rmb20bn in its Groupon-like site in an effort to make it the number two player in the market by the end of the year.

Chinese online groups agree merger in deal worth up to $20bn

With Meituan backed by ecommerce giant Alibaba and Dianping by social media and gaming group Tencent, the merger marks a decision to forgo an expensive price and subsidy war and focus on creating scale. In this, it echoes the $6bn tie-up in February of car hailing apps Didi Dache and Kuaidi Dache to form Didi Kuaidi — Didi Dache was backed by Tencent and Kuaidi Dache by Alibaba.

“All of these businesses face heavy marketing costs and customer acquisition costs,” said Mark Natkin of Beijing-based Marbridge Consulting. “They can either go at each other and see who wins the war of attrition or choose the other top player and merge, and make life difficult for the number three and number four players.”

Chinese online groups agree merger in deal worth up to $20bn

Ding Daoshu, director of Beijing-based internet consultancy Sootoo, said the move would save both parties money “as their absolute dominance of the industry [means] high subsidies will no longer be necessary, [so] this cash-burning frenzy can be put to an end”.

Zhang Tao, Dianping chief executive, in a statement on Thursday called the merger “a shared, and almost inevitable, decision” that “allows both companies to better leverage our respective advantages”.

The combined entity would likely command a far higher valuation than either could alone, with valuations of private companies in China dropping recently due to stock market turmoil and slower economic growth.

Early this year Meituan was valued at $7bn while Dianping raised money at a valuation of $4bn. But together, participants in those fundraisings said that the two could be worth as much as $20bn.

Despite the differing sizes and valuations, the tie-up was being billed as one of equals. The two company heads would become co-chief executives of the new company, which would have two head offices, one in Beijing where Meituan is based and one in Shanghai, Dianping’s home.

“The two are not strictly ‘merging’ — it is more like an acquisition because Meituan’s market share is nearly twice that of Dianping,” said Mr Ding. He noted that in other mergers this year between companies of unequal weight, such as that of Didi and Kuaidi, all started with the double-CEO structure, but added: “this is just a transition phase, and it’s clear the management of the smaller company will be phased out eventually”.

The deal would give existing management a significant share of the merged unit. Sequoia Capital Management, which has been an investor in Meituan and Dianping in almost all of their financing rounds, would be a big beneficiary, along with other stakeholders including Alibaba and Tencent.

Investors in a wide variety of internet companies in China are increasingly insisting on such marriages in an effort to generate positive cash flow. But the speed of consolidation has taken many observers and analysts by surprise.

“There used to be 1,000 Groupon lookalikes in China,” said Neil Shen, who runs Sequoia’s China business. “But now Meituan and Dianping have about 70 per cent market share. After fierce competition they are willing to co-operate because they know that in this case one plus one is far more than two.”

Source: Financial Times
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