Mogujie to buy Tencent-backed rival Meilishuo

The two Chinese fashion, e-commerce startups are joining forces to form a new venture valued at some $3 billion as the industry consolidates amid a tougher fundraising climate.

Internet fashion start-up Mogujie is taking over key rival Meilishuo to form a new company valued at some $3 billion as China's e-commercial industry continues to consolidate amid fierce competition and a harder fundraising climate.

Mogujie, which means “Mushroom Street” in English, has agreed to acquire Tencent-backed Meilishuo, or “Beauty Talk”, through a 2:1 share swap, the online social-shopping firm said on Monday. 

As part of the deal Tencent will increase its stake in the new combined entity, Chen Qi, Mogujie’s founder and chief executive officer, said in an internal company communication seen by FinanceAsia, without providing further details.

“After the merger with Meilishuo, we can avoid unnecessary competition and save a lot of costs,” Chen said in the letter. “The enhancement after the merger will help us to leave far behind other firms that attempt to compete with us.”

He added that the transaction values Mogujie twice as much as Meilishuo and that he would be CEO of the new company, which registered combined sales of Rmb20 billion ($3 billion) last year. 

The Mogujie-Meilishuo marriage is the latest high-profile technology tie-up in China as investors become more wary about pouring money into firms that gain market share mainly by “burning cash”, according to some investors and market insiders.

“Their merger makes a lot of sense amid a tougher fundraising environment for tech firms,” Li Jinwen, a technology expert and CEO of LogInn, a Chinese startup incubator, told FinanceAsia. “The volatility in the stock market since last summer has made investors more cautious than before.”

China’s stock market, dominated by retail investors, has been one of the most volatile in the world over the last 18 months, with the Shanghai Composite index advancing by as much as 150% in a year-long rally running through mid-June, before plunging 43% by late August. It recovered somewhat subsequently but has plunged again into 2016 and is already down 11% so far this year.

Growing pressure

Changes in investor sentiment, therefore, have put Chinese technology start-ups under growing pressure to consider tie-ups with rivals to put an end to costly competition.

Beijing-based Meilishuo tried to tap investors for fresh capital in the months prior to the merger's announcement, without success, while Hangzhou-based Mogujie raised around $200 million in November at its last fundraising round, led by Ping An Ventures, a venture capital arm under Ping An Insurance, according to statements from the company at the time.

Hillhouse Capital, founded by billionaire Chinese financier Zhang Lei, has invested in both firms. 

“It will be much easier for investors to exit after the merger, as the combined company has a bigger chance to raise fresh capital and go public in the future,” said LogInn's Li. “From the entrepreneurs’ perspective, no one is really willing to see his firm being merged. It’s more pushed or driven by the investors.”

Chen of Mogujie, however, told Chinese financial publication Caixin earlier on Monday that the merger was “a rational choice” for the two companies’ founders.

The transaction also follows in the footsteps of other mergers and acquisitions in the Chinese technology sector. In October Meituan and Dianping merged to form the country’s largest online-to-offline platform, parroting the precedent set by rival taxi-hailing services Didi Dache and Kuaidi Dache in February.

Mogujie, founded in 2011 by Chen, a former division manager at Chinese internet giant Alibaba, drew investments from big names such as Banyan Capital and Qiming Venture Partners, as well as Hillhouse Capital. It soon developed into a big player in Chinese women's fashion and social shopping, with 130 million registered users.

Set up in 2009, Meilishuo has long been Mogujie’s main competitor. Its main investors include Sequoia Capital, BlueRun Ventures, GGV Capital, in addition to Tencent. 

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