INTERNET: Tencent, Baidu Travel Together with Bitauto Investment

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Bottom line: A new $300 million investment by Tencent, Baidu, JD.com and a private equity firm in Bituato is aimed at providing major strategic partners to ensure its continued profitability as an independent car trading platform.

Baidu, Tencent, JD invest in Bitauto

China’s non-stop chain of Internet M&A has created some strange bedfellows, including a new investment that will make partners out of search leader Baidu (Nasdaq: BIDU) and social networking giant Tencent (HKEx: 700). The pair, 2 of China’s top 3 Internet companies, are coming together with e-commerce giant JD.com (Nasdaq: JD) and another private equity firm to invest a fresh $300 million in online car listing services firm Bitauto (NYSE: BITA). The investment by each company is relatively small, and has slightly different significance for all 4 parties involved.

Among China’s top 3 Internet companies, Baidu has been the most aggressive in online-to-offline (O2O) services that combine Internet functions with real-world services like dining and transport. One of its biggest focuses has been car-based services. The company already operates China’s most popular online mapping service, and is pushing heavily into O2O take-out dining services and self-driving cars. It is also an investor in global private car services giant Uber.

Despite that, Baidu hasn’t invested in any major car information services companies yet, which may explain its new interest in Bitauto. This particular deal will see Baidu, Tencent and JD.com each pump $50 million into Bitauto by buying the company’s American Depositary Shares (ADSs) for $20.23 apiece. A third private equity partner, PA Grand Opportunity Ltd, will subscribe to another $150 million in bonds convertible to Bitauto stock at an initial price of $23.67 per ADS.

Based on my calculations, Baidu, Tencent and JD will each get about 4 percent of Bitauto’s shares under the deal. Bitauto ADSs closed at $20.46 the day before the announcement, meaning Baidu, Tencent and JD.com are all getting their stock at a slight discount to that price. The stock jumped 12 percent to $22.95 after the deal was announced, which is about 3 percent below the conversion price given to PA Grand Auto.

Boosting Existing Stakes

We’ve already examined Baidu’s motivations for pursuing this deal, so let’s now look at Tencent and JD. For starters, we should point out that Tencent and JD are already closely tied through a major stakeholding in the latter by the former. What’s more, the pair previously teamed up to buy 28.3 percent of Bitauto’s stock early last year, in a complex deal involving more than $1 billion in investment. (previous post)

Thus based on figures from last year’s deal and this latest investment, we can assume that Tencent now holds about 7.3 percent of Bitauto, while JD.com holds the largest 29 percent, and Baidu holds its nearly acquired 4 percent. Tencent also owns a stake in Shenzhen-listed mapping firm NavInfo (Shenzhen: 002045) through a 2014 investment worth nearly $200 million.

From Tencent and JD’s perspective, this investment is probably most closely tied to their delivery services that are part of JD’s core e-commerce business. Tencent also has close ties through earlier investments to Didi Chuxing, China’s homegrown equivalent of Uber. Lastly but not least, JD is also making its own push into O2O take-out dining services through its recent $200 million purchase of online platform operator Dada. (previous post)

One final piece to this puzzle is China’s other major Internet player Alibaba (NYSE: BABA), which entered the space 2 years ago with launch of a used car trading platform with China Grand Auto, one of the nation’s largest car sellers. (previous post) The sector’s other major player is Autohome (NYSE: ATHM), which has become embroiled in a controversial privatization bid pitting its own managers against Australia’s Telstra (Sydney: TLSA), its largest single stakeholder. (previous post)

This latest tie-up seems a bit twisted since Tencent and Baidu are technically big rivals, and Tencent or JD clearly could have pressured Bitauto to exclude Baidu from this new investment. My best guess is that Tencent and JD didn’t feel Baidu posed a big threat to them in this particular area, and they most likely wanted to bring in some new business for Bitauto that will allow it to operate independently and profitably going forward.

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