Meituan-Dianping merger to form 020 powerhouse

Scorching competition in the online-to-offline sector motivated the former rivals to agree to the merger, creating a Chinese O2O heavyweight capable of taking on Baidu's Nuomi.

Two large Chinese tech startups Meituan and Dianping have agreed to a merger, forming the country’s largest online-to-offline (O2O) platform and presenting a formidable obstacle for would-be competitors in the hotly contested sector, according to two sources familiar with the matter.

The alliance between, a Groupon-like lifestyle platform partly owned by Chinese Internet giant Alibaba, and Tencent-backed restaurant-review website will be officially announced as early as Thursday, one source told FinanceAsia.

A second source said former rivals Meituan and Dianping will likely set up a new offshore entity with respective 60% and 40% ownership stakes. He added the new firm will adopt a dual CEO structure.

“The merger has been processed very fast…the two companies are fighting against the clock,” the second source said. “They have to combine forces for survival [amid fierce competition in the O2O industry].”

Meituan, Dianping, Alibaba and Tencent all declined to comment on the deal.

In recent years the country’s O2O sector has witnessed intensifying competition as Internet titans battle it out for bigger market shares in the fast-growing industry. According to an HSBC estimate, China's O2O market is worth about Rmb10 trillion ($1.57 trillion) and will continue to grow following its “very strong initial success”.

In June, Baidu, China’s dominant internet search company, unveiled plans to ramp up spending on O2O, a primary driver for its long-term growth. It is investing Rmb20 billion ($3.2 billion) over the next three years in Nuomi, an online group-buying platform which Baidu acquired last year.

Industry insiders said the Meituan-Dianping marriage could throw a spanner in Nuomi’s ambitious expansion plans.

“Nuomi originally aimed to beat Dianping and then overtake Meituan. Nuomi’s market strategy will be quite affected by the merger,” said a Beijing-based industry insider. “Baidu still has to ‘burn cash’ in the [costly] O2O business, but now, it’s hard to tell what results it can achieve.”

According to Beijing-based Internet consultancy Analysys International, Meituan contributed 51.9% of group-buying turnover in the first half this year, while Dianping and Nuomi accounted for 29.5% and 13.6%, respectively.  

The merger is also being played out against a backdrop featuring the so-called winter of China's capital markets -- a post-stock market crash period in which many Chinese companies are finding it hard to raise funds.

“It’s already very difficult for even big companies like Meituan and Dianping to seek [more] financing to carry on the price war,” Li Jinwen, a tech expert and former CEO of Beijing’s Tech Temple, a Chinese startup incubator, told FinanceAsia, referring to a common practice of picking off rivals by offering big discounts to gain market share in the O2O business. 

“The merger is the best option for both companies,” she said. “As industry leaders are moving fast to have a head start, other smaller players should really stop fighting on their own [and also seek out alliances]. This combination will lead to a new wave of mergers and acquisitions in the O2O industry.” 

The transaction value of domestic and outbound merger and acquisition activity by Chinese tech firms has reached about $63 billion so far this year, up roughly 85% from the same period last year, according to data provider Dealogic.

The union of Meituan and Dianping also marks a second Alibaba-Tencent tie-up this year following the merger of Didi Dache and Kuaidi Dache, online taxi-hailing services separately backed by the two Internet giants.

Didi Kuaidi, valued at $6 billion in February, was created when China’s two largest taxi-hailing apps teamed up in a bid to curb Silicon Valley's Uber, in which Baidu holds a stake, from expanding in the country.

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