E-Commerce Tie-Ups: Tencent-Jingdong, Dangdang-Yihaodian
It’s a new day on the Chinese Internet, which is as good an excuse as any to talk about rumors of the latest tie-ups in the overheated e-commerce space. One of the latest pieces of gossip has a partnership taking shape between JD.com and Tencent (HKEx: 700), China’s second and third largest e-commerce operators. The other has an alliance forming between Dangdang (NYSE: DANG) and Yihaodian, 2 smaller players at the bottom of the list of the country’s top 10 e-commerce firms. I’ll offer my own guess that there’s a 50-50 chance the first rumor is true, while chances of Dangdang-Yihaodian tie-up look much smaller, perhaps around 20 percent.
We’re likely to see many such rumors in the months ahead, as a much-needed consolidation looks set to finally come to China’s fast-growing but also intensely competitive e-commerce space. We’ve seen similar consolidation in other similarly overheated sectors over the last year, with most online video sharing and group buying sites either being acquired or closing during that time. E-commerce has so far resisted such consolidation, mostly because many of the companies have wealthy backers who are willing to keep funding money-losing operations. But even those wealthy patrons have limited patience, and probably want to see some profits sooner rather than later.
Let’s start with Tencent, operator of the Yixun e-commerce site, and JD.com, previously known as Jingdong and 360Buy.com. The latest media reports cite unnamed sources saying Tencent nearing a deal to take a stake in JD.com, which recently made its first public filing for a New York IPO. (English article) The reports follow earlier similar rumors, and don’t contain much more detail except to say that an announcement could come soon. But the source for the stories is the 21st Century Business Herald, which has a fairly solid reputation for accurate reporting.
The combination sounds like it would most likely see Tencent take a strategic stake in JD.com, probably in the 10-20 percent range. Depending on who you believe, such a stake would cost anywhere from $1 billion to as much as $6 billion, based on a wide range of recent estimates that say JD.com is worth anywhere from $10-$30 billion.
Such an investment could be important for JD.com, as it would be a major vote of confidence in the company due to Tencent’s status as China’s largest Internet firm. Such an investment would also help to put a more concrete valuation on JD.com as it moves towards its IPO, easing concerns that investment bankers underwriting the deal might try to inflate the company’s value. Strategically, such a tie-up would also look smart, potentially combining China’s second and third largest e-commerce firms under one roof to create a company with nearly a quarter of China’s B2C market, making it a strong rival to industry leader Alibaba.
From that larger tie-up, let’s look quickly at the other major rumored pairing that would see Dangdang pool its resources in an equity tie-up with Yihaodian, the e-commerce company controlled by global retailing giant Walmart (NYSE: WMT). The sourcing on this particular rumor is quite flimsy, with one report simply saying that media are predicting such a tie-up based on a Valentine’s Day co-promotion between the pair. (Chinese article) That promotion hinted the 2 companies could launch an investment product on February 18, which has already come and gone.
Such a pairing would certainly make sense, since Dangdang doesn’t really have the scale or focus to survive over the long-term as an independent company. Walmart probably wouldn’t mind adding Dangdang’s name and customer base to Yihaodian’s either. But both companies have strong-minded leaders who might be reluctant to give up their independence, and Dangdang has formed many similar short-term alliances before that never led to anything larger. All of those factors lead me to suspect that the chances of such a tie-up are relatively small.
Bottom line: Rumors of a Tencent investment in JD.com have a 50-50 chance of being true, while the likelihood of a similar tie-up between Yihaodian and Dangdang is much smaller.
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