INTERNET: Ganji Charges Up 58.com On Merger Talk
Bottom line: A merger between 58.com and Ganji looks like a smart pairing that would create a clear leader in online classified ads with a market value worth up to $8 billion.
China’s Internet world has been buzzing these last 2 days on a steady stream of reports involving a possible merger between leading online classified advertising site 58.com (NYSE: WUBA) and Ganji, one of its biggest rivals. The reports have been somewhat conflicting, some saying a deal is imminent and others saying talks have stalled, but it’s clear that something is happening behind the scenes. The deal certainly looks quite exciting if it’s happening, as it would create a clear market leader anchored in the well-run 58.com, which is often called the Craigslist of China.
This kind of merger often fails to happen in China for reasons of pride, as many of these company founders are fiercely independent entrepreneurs who would rather see their empires slowly crumble than sell to someone else. But more recently we’ve seen some of these entrepreneurs become more realistic and realize they can’t survive as independent companies, and I suspect that’s what’s happening in this case.
We’ve already gotten a very rough indication of the value of this potential deal, following a 34 percent jump in 58.com’s stock after the latest media reports saying the company had signed a memorandum of understanding (MOU) to merge with Ganji. (English article; Chinese article) That equated to an additional $2 billion in market value, bringing 58.com’s total market capitalization to $6 billion. One media report said a merged firm could have a market value as high as $10 billion, though that figure seems a bit lofty.
The first series of reports came out at the start of the week, saying the 2 sides had previously been in talks for a merger but the deal fell apart due to Ganji founder Mark Yang’s lack of willingness to cede control. (English article) Those reports went on to say that Gangji was attempting to raise $200 million in funding instead by selling a stake to private investors, but that it was meeting with resistance due to unrealistically high valuation expectations. If we assume it may have been willing to sell 5 percent for that price, that would put its target valuation at about $4 billion.
No sooner had that first set of reports come out, then this latest second set emerged saying a deal had been reached and the MOU signed. The latest reports cite Gangji saying an official announcement on the situation will come on Thursday, which certainly seems to imply that something major is happening.
The numbers seem to add up, and the sequence of events and reports implies that 58.com was willing to pay an amount that gave Ganji something close to the valuation it wanted. If we assume Gangji will be valued at perhaps $3.5 billion, and that 58.com is twice that size, that would produce the $10 billion total valuation for the 2 companies in the media reports. If investors agreed, that would mean there’s quite a bit of potential upside to 58.com’s latest market value of $6 billion.
From a strategic standpoint, this merger certainly makes a lot of sense. The 2 companies are very similar, which is probably why 58.com was willing to pay more than other private investors. Thus a merger would create a new industry leader with strong growth potential in China’s online classified advertising market.
We’ve seen a couple of similar mergers in the last few years that brought together former rivals, most recently with the marriage announced earlier this year between leading taxi app operators Kuaidi and Didi. In that case and in this one, market economics are driving the moves rather than owner pride, which marks an important change for these Chinese companies. I personally like this latest pairing, as both companies seem well run and reputable, and would expect to see a final valuation of perhaps as much as $8 billion if the pair announce a merger.
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