INTERNET: New Internet Giant Emerges In 58.com-Ganji Tie-Up

By newsdoug on April 20, 2015

Bottom line: 58.com’s new Ganji tie-up looks like a smart partnership that should create a clear industry leader with a strong strategic partner in Tencent, though the stock could be set for a short-term correction due to overvaulation.

China’s Internet has just gained a major new player through the combination of online classified sites 58.com (NYSE: WUBA) and Ganji, which together will have a market value approaching the $10 billion level. Few companies outside the “Big 3” of Baidu (Nasdaq: BIDU), Tencent (HKEx: 700) and Alibaba (NYSE: BABA) can boast such valuations, and this particular deal seems to mark the emergence of a new sector leader that could even become an acquirer on the global stage.

Of course it’s easy to talk about going global, but actually doing that has been far more problematic for China’s booming field of Internet players. Still, this latest deal appears to show that 58.com may have the savvy that some of its larger rivals lack to make the global push, perhaps using this Gangji deal as a template for more strategic acquisitions in developing markets similar to China.

I particularly like this deal because it will see 58.com purchase a sizable but still minority stake in Ganji. That means control of Gangji is likely to stay with its entrepreneurial founder, at least for now, while drawing on 58.com’s financial and other resources to improve its performance.

This particular deal was rumored for much of last week, and was finally announced just as the week was closing. (previous post) Under the tie-up, 58.com, often called the Craigslist of China, will get 43.2 percent of Ganji. (company announcement; English article; Chinese article) In exchange, 58.com will provide $412 million in cash and the equivalent of 17 million of its American Depositary Shares (ADSs) to Ganji.

Based on 58.com’s latest stock price, which included a 4.3 jump after the deal was announced, the purchase price is about $1.6 billion. That would value Gangji at about $3.7 billion, and a combined company at nearly $9 billion — about the same as leading travel site Ctrip (Nasdaq: CTRP) and 4 times the value of leading web portal Sina (Nasdaq: SINA).

The deal also includes participation by social networking (SNS) giant Tencent, which will pay $400 million to boost its existing stake in 58.com. That additional investment will bring Tencent’s stake to 25 percent of 58.com, continuing a strategy that has seen Tencent buys similar major but minority strategic stakes in other companies like restaurant ratings site Dianping and e-commerce site JD.com (Nasdaq: JD).

I have to admit that all of these minority strategic stakes could begin to get confusing and even create future problems if different stakeholders have different ideas about the future directions of their companies. But in theory at least, the concept means that original managers will remain in control of their companies, which should be good since these are the people that best understand those companies.

At the end of the day, I would tend to agree with the prevailing market view that this new tie-up is good for both 58.com and the broader Chinese Internet sector in general. This kind of consolidation is sorely needed on China’s Internet, where there are far too many players and not enough business for everyone to keep growing at healthy rates. In this case 58.com will become the clear market leader, and could leverage its growing web of connections to find synergies with Tencent and some of Tencent’s other partners like JD.com and Dianping.

58.com has been one of the best performing of a bumper crop of new Chinese Internet listings that dates back to late 2013. With the latest gains, its shares have now risen 4-fold from their IPO price of $17 just a year and a half ago, making its shares a bit pricey right now. Accordingly, I wouldn’t be surprised to see a pullback in the next few months as euphoria over the Ganji deal wears off. But over the longer term I would still say the stock looks like a good investment.