Ctrip Mega Bond: Qunar Investment Coming?

Online travel site Ctrip (Nasdaq: CTRP) has just become the latest Chinese Internet company to announce a mega-bond offering, taking advantage of its market-leading status to raise up to $500 million. While the bond itself is interesting, the more intriguing matter is what Ctrip plans to do with the funds. The company says that acquisitions is one possibility, leading me to speculate the company could purchase a stake in fast-rising rival Qunar, or even purchase the company outright.

After years of inactivity, major M&A has suddenly heated up this year in China's Internet space, fueled by a small group of cash-rich industry leaders purchasing money-losing smaller firms that have strong prospects but are starved for funds. Leading e-commerce firm Alibaba, top search firm Baidu (Nasdaq: BIDU) and social media leader Tencent (HKEx: 700, [[TCEHY.PK,]]) have all made purchases worth hundreds of millions of dollars this year, both inside and outside China. Tencent and Baidu have financed those deals partly with mega bond offerings, and Alibaba has also raised cash by bringing in new investors.

Now Ctrip looks set to enter the M&A rush, with its announcement of this new convertible bond offering. Most of the announcement is technical, and not really worth repeating here. The main buyers appear to be hedge funds, which are betting that Ctrip's shares will continue their recent rally, making the bonds more valuable for eventual conversion to Ctrip shares.

But what's much more intriguing is the part of the announcement where Ctrip says the funds could be used to finance acquisitions. That's where Qunar comes in. Qunar is majority owned by Baidu, which purchased 62 percent of the company in 2011 for $300 million. Assuming the company has roughly doubled in value in each of the 2 years since Baidu's purchase, Qunar would now be worth around $2 billion.

At the same time, Qunar has been anxiously awaiting an opportunity to make an IPO, as the company has most likely burned through much of its cash to fuel its fast growth and is reportedly still losing money. Qunar tried to make its offering last year in New York, but had to scrap the plan due to dismal investor sentiment towards money-losing Chinese Internet companies. Reports last month indicated it had relaunched the plan, and hoped to make the offering by the end of the year (previous post).

In terms of their relationship, Ctrip and Qunar were previously bitter rivals, using different business models to launch a series of price wars last year that caused Ctrip's profits to tumble. But since then the 2 have become a bit chummier, and they even announced a tie-up in August that saw Ctrip offer some of its vacation packages over Qunar's platform (previous post). All of that, combined with this latest bond offering, leads me to speculate that an equity tie-up could be brewing for these 2 companies, which would create a formidable player in China's online travel space.

The most likely scenario could see Ctrip purchase a big portion of Qunar, perhaps up to 30 percent of the company, to generate buzz as Qunar marketed its IPO. The more exciting scenario would see Ctrip purchase Qunar outright, though I think that's probably less likely as Baidu would probably like to retain some of its stake. Either way, this new bond offering could foreshadow a very exciting new tie-up, with potential to create not only a Chinese sector leader but also a company that could eventually challenge global players like Expedia (Nasdaq: EXPE) and Priceline (Nasdaq: PCLN).

Bottom line: Ctrip's $500 million bond offer could foreshadow a major investment in or outright purchase of fast-rising rival Qunar.