Back in 2014, an ambitious property mogul named Wang Jianlin set out plans to work with up-and-coming tech player Tencent to carve out a slice of the burgeoning online-to-offline retail space for his Wanda Group empire.
It didn't quite work out. That venture, ffan.com, never took off and investments from Tencent and search giant Baidu never actually came to fruition.
Wanda and Wang have been through the mill since then, with its overseas asset-buying spree catching negative attention from regulators. But the O2O idea hasn't gone away, and on Monday Wanda revived its O2O ambitions, with a familiar partner in the form of Pony Ma's Tencent.
This time, the vehicle will be Dalian Wanda Commercial Properties, the shopping mall group Wang delisted in Hong Kong in 2016 in the hope of finding a richer valuation in China. That take-private came at a more optimistic time for Wang, who now faces a looming deadline to complete the relisting or make big payouts to shareholders.
At Wanda’s annual gala event in Harbin this month, Wang told group employees Wanda Commercial, the property arm of Wanda Group, needed “to gradually settle all overseas interest-related liabilities and have a reliable scheme for raising funds for Wanda Commercial Properties so as to be listed in Shanghai”.
What he meant became clear in Monday's announcement of a deal with a Tencent-led consortium that also includes one of China’s largest retailers Suning, Alibaba’s e-commerce rival JD.com, and real estate developer Sunac China. They will collectively invest approximately Rmb34 billion ($5.37 billion) to acquire around 14% of Wanda Commercial’s equity interest held by investors participated in its Hong Kong delisting.
The delisting investors, who paid HK$34.45 billion ($4.41 billion) collectively and HK$52.8 per share in Wang’s buyout in 2016, were guaranteed annual returns of 10% to 12% if the company failed to relist by September 2018. Wanda Commercial has been since trying for an A-share relisting or backdoor listing, but is yet to win the required approval.
The deal with the consortium means Wanda can not only satisfy its investors but can also reposition itself with a new investor profile to help convince the China Securities Regulatory Commission to approve an A-share IPO.
“The relevant parties will strive to take the company public as soon as possible,” Wanda Commercial said in announcing the deal.
Wanda Commercial will be renamed Wanda Commercial Management Group, a reflection of the property arm going “asset-light”, a model Wang first pointed to in a 2015 public speech. It aims to offload properties in the next one or two years and will stop engaging in property development, focusing instead on commercial management, said the firm. Wanda on Tuesday dismissed reports the group was abandoning property development, saying it would set up a new real estate unit to engage in asset-heavy activities.
Based on an exchange filing by Hong Kong-listed Sunac, which is paying Rmb9.5 billion for approximately 3.91% of the company, this deal values Wanda Commercial at around Rmb243 billion. Tencent is paying approximately Rmb10 billion for 4.12%, Suning Rmb9.5 billion for 3.91% and JD.com Rmb5 billion for 2.06%, based on disclosed figures by some parties and calculations.
According to Chinese website Caixin, Wanda Commercial has to generate at least Rmb19 billion of net rental income in 2019, and complete its listing in mainland China, Hong Kong or elsewhere by October 31, 2023 as part of the agreements. Tencent declined to comment on the detailed terms while Wanda did not reply to requests for comment.
The deal came hot on the heels of an outbreak of “New Retail” fever in China’s O2O industry; recent deals include Tencent’s alliance with French supermarket giant Carrefour, Alibaba’s investment into Sun Art Retail Group, and JD.com’s creation of its own offline fresh-food supermarket.
“This represents one of the world’s largest single strategic investments between internet companies and brick-and-mortar commercial giants,” said the announcement, painting the deal as an effort to “jointly build O2O ‘New Consumption’".
There are solid reasons for tech players like Tencent to look at brick and mortars. Given rising customer acquisition cost and high online penetration for certain product categories, offline has become the new traffic gateway for e-commerce players who are chasing the 85% of China’s retail sales that are not yet online and reach the 60% of consumers who have not yet turned to online shopping, Jefferies’ analysts concluded in a January 23 report.
Alibaba, for example, now has 25 fresh-food Hema Supermarket stores across seven cities in China and plans to open up 30 more new stores in Beijing this year. According to Jefferies’ channel check, 50% of Hema Supermarket customers did not previously use its Taobao online mall or Alipay, while only 10% of total fast-moving consumer goods customers are existing shoppers of both Sun Art and Alibaba.
That said, whether Wanda's new alliance will deliver solid results to investors remains untested. There is a precedent for failure after all.
On August 29 2014, Wang stood with Tencent’s Pony Ma and Baidu’s Robin Li, smiling and shaking hands in front of cameras at InterContinental Hotel in Shenzhen. Wanda, Baidu and Tencent unveiled then a new e-commerce venture just ahead of Alibaba Group’s US stock offerings, with an ambition to revolutionise the mall shopping experience.
The trio agreed to collectively invest Rmb5 billion to start as they chased the O2O opportunity, which Wang dubbed “the biggest cake” left in the e-commerce sector. The concept seemed to have been well received – Wanda in early 2015 announced the closing of a funding round for the venture, which included another Rmb1 billion from other investors and valued the venture at more than Rmb20 billion. In July 2015, Wanda launched an e-commerce portal, ffan.com, which was intended to become the “world's largest O2O e-commerce company” by helping shoppers find items in malls and merchants manage their payments and data.
It didn't quite work out like that…
Dogged by problems including personnel departures, the venture failed to take off. Even Wanda itself admitted in private ffan.com was a failure. In a statement in August 2016, ffan.com revealed Tencent and Baidu had never injected any capital into the venture, and their equity interest – intended to be 15% by each – was financed by a company backed by Wang.
Yet Wang’s confidence in Wanda’s O2O bid seems intact. “Practice has proved that it is hard to distinguish between online and offline enterprises. Four or five years ago, I had an argument with Pony Ma but now the two of us have agreed that online and offline enterprises need to integrate,” he said during the group’s year-end gathering.
This deal will give him the chance to turn vision into practice.