I don't usually write about the same news twice in a single week, but in this case reports with new details on looming tie-ups involving four of China's top e-commerce firms seem to justify an update. In the larger of the deals, the latest reports say top Internet firm Tencent (tcehy) is nearing a deal that would see it buy 6-20 percent of JD.com, forging a partnership that would create a major new e-commerce contender to rival industry leader Alibaba (ABABA). In the second update, two smaller e-commerce firms, Yihaodian and Dangdang (NYSE:DANG), have confirmed earlier reports that they will announce a major alliance early next month.
When I wrote about both of these deals earlier this week, I said the odds that a Tencent-JD.com tie-up would happen were 50-50, while the odds for a Yihaodian-Dangdang partnership were much lower, at around 20 percent. (previous post) Clearly I was wrong about the second deal, since Dangdang and Yihaodian, which is controlled by global retailing giant Wal-Mart (NYSE:WMT), have now confirmed that they will announce a new tie-up on March 5. (English article) Tencent and JD.com still haven't confirmed anything about their partnership, though the increasing frequency of reports and level of detail greatly increases the possibility that a deal will be announced.
Let's start with the latest headlines on the JD-Tencent tie-up, which would see the latter purchase a strategic stake in the former. One report says Tencent is nearing a deal to purchase 6 percent of JD.com (Chinese article), while another says the deal would involve a larger 20 percent stake sale. (English article) Wording in the latter report is a bit more vague, implying that perhaps Tencent could initially buy a smaller stake with an option to later boost it to as high as 20 percent. The cost of such an investment could vary widely depending on whose valuations you believe, but I would expect a 6 percent purchase would carry a price tag in the $500 million to $1 billion range.
One of the reports says that Tencent would then combine its e-commerce sites, which include the 51buy.com and Yixun.com sites, with JD.com's own site. That would create a player with about a quarter of China's B2C e-commerce market, making it a major rival for industry leader Alibaba, which has about half of the market. The new player would have a major new weapon from Tencent's popular WeChat mobile instant messaging platform, which is rapidly developing its e-commerce capabilities. (previous post) Such a tie-up would mark the biggest merger to date in China's overheated e-commerce space, which is sorely in need of consolidation.
From that bigger tie-up, let's look at the latest news on Dangdang and Yihaodian, which also goes by the name Yhd.com. The most significant element of these latest reports is simply the fact that Yhd has confirmed a tie-up, which the companies will announce on March 5. Sources for previous reports were quite sketchy, which was one of the reasons I predicted that chances for such a deal were only about 20 percent.
Yihaodian didn't give any additional details on the nature of the partnership, but I expect it could involve its purchase of a strategic stake in Dangdang, perhaps in the 10-20 percent range. Dangdang shares jumped sharply earlier this month as rumors of a deal first surfaced, though they've given back some of the gains since then. Such a deal would create a new player with 3-5 percent of the market, though analysts pointed out the 2 companies don't have big overlap in their customer bases. Still, this kind of consolidation should be a welcome development for the overheated sector, and I expect we'll see a few more similar major tie-ups as the year progresses.
Bottom line: Tencent is likely to buy 6 percent of JD.com when the pair announce a strategic tie-up, while Yihaodian could make a larger investment in Dangdang in their new partnership.