INTERNET: Baidu-Meituan Merger Talk Looks Spicy, But Dicey

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Bottom line: Rumors that Baidu may be planning to merge its take-out dining and group buying units with Meituan-Dianping are consistent with recent market trends, but are less likely to be true due to Baidu’s strong denial.

Baidu denies merger plan for group buying, dining units
Baidu denies merger plan for group buying, dining units

I normally try to avoid writing about rumors that lack strong foundation, but the latest gossip about a potential new mega tie-up between 2 non-core units of online search leader Baidu (Nasdaq: BIDU) and group buying giant Meituan-Dianping look too spicy to ignore. Baidu came out with a statement late on Tuesday denying any talks were taking place to combine its take-out dining and Nuomi group buying services with Meituan-Dianping. But that said, any veteran China watcher will know that companies frequently deny such rumors even when they’re true.

I’ll start by giving my own view that this particular rumor probably has a less than 50 percent chance of being true, mostly because the wording in Baidu’s denial is slightly stronger than usual. But such a rumor would certainly be consistent with recent market trends, which have seen investors pressure big money-losing Chinese companies to merge with rivals to end their cut-throat competition.

Meituan-Dianping is actually the result of one of the earlier mega-mergers, and saw the 2 former bitter rivals combine to form the current company last year. Other similar tie-ups include the recent blockbuster merger plan between private car service leaders Didi Chuxing and Uber China, and a major equity tie-up between online travel agents Ctrip (Nasdaq: CTRP) and Qunar (Nasdaq: QUNR).

That brings us to Baidu, which has spent heavily over the last 2 years to diversify beyond its core online search business that accounts for most of its revenue and all of its profits. Baidu has come under pressure from shareholders to stop the big losses at many of those newer businesses, including its online video unit iQiyi, its Nuomi group buying site and its web-based take-out dining service.

Meituan-Dianping also counts takeout dining and group buying as two of its largest businesses. Thus both companies could kill two birds with one stone by combining their take-out dining and group buying services, which would instantly lower the cut-throat competition in the market.

There’s not much more to the many media reports on the talks, though some say that China Renaissance Partners was hired as financial adviser and that a deal was 80 percent completed. Other reports are pointing out the many reasons why such a deal would make sense and be consistent with recent trends. (Chinese article) But then Baidu came out with its denial, saying the reports were “inconsistent with the truth” and that it hadn’t hired Renaissance Partners.

Deal Logic

Some observers might say that perhaps a deal might be happening, and perhaps it was Meituan-Diaping that hired Renaissance Partners and not Baidu. Furthermore, Baidu’s statement that the reports were “inconsistent with the truth” could mean perhaps that the talks weren’t 80 percent advanced and were maybe in an earlier stage, or maybe even that a deal was imminent.

All that said, the logic of a deal certainly makes sense and is consistent with recent trends. Baidu came under fire last year from investors who were unhappy about its money-losing businesses, and has moved to spin off many of those assets since then. It has already separated itself from Qunar, a company it once controlled, by forming a new major equity tie-up with Ctrip last year.

Baidu is also in the process of trying to spin off iQiyi, its video unit that is losing big money due to fierce competition from names like Alibaba’s (NYSE: BABA) Youku Tudou and LeEco (Shenzhen: 300104). Thus a divestiture of its take-out dining and group-buying services would continue that trend, and potentially breathe some new life into Baidu’s depressed stock. For all those reasons I would peg the chances of a deal happening at around 40 percent, with my biggest doubts prompted by Baidu’s relatively strong denial.

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