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The new week is just beginning, but it could well go down as a pivotal moment in Chinese Internet history with Tencent's (OTCPK:TCEHY, HKEx: 700) new announcement of an e-commerce alliance with JD.com that could threaten the dominance of sector leader Alibaba. The tie-up, which was first rumored last month, will see Tencent pay $215 million for 15 percent of JD.com, which will also receive some of Tencent's e-commerce assets including a minority stake of its flagship Yixun.com B2C service (company announcement). The companies will merge their e-commerce businesses, creating a new player with nearly a quarter of China's B2C e-commerce market.

The deal is one of the largest to date in China's Internet space, which entered a rapid consolidation in 2013 after years of fragmentation and fierce competition. I'll try to give a valuation shortly, though it's hard to be too exact due to the involvement of so many privately-held assets. The deal will not only pressure Alibaba, which controls about half of China's B2C market, but will also turn up the heat on others to find merger partners or risk being marginalized or driven out of business. I'll also discuss other potential pairings at the end of this post.

But first let's look more closely at the new announcement, which was released this morning before the market opened. In addition to its 15 percent stake purchase, Tencent will also receive the right to buy an additional 5 percent of JD.com as the latter heads toward New York expected to raise up to $1.5 billion. One of my sources with direct knowledge of the situation tells me JD.com will initially receive 10 percent of Yixun, with the option to buy the rest of the site at a later date. The announcement includes a number of financials for both JD.com and the Tencent assets being transferred. The Tencent assets posted a relatively modest loss of 71 million yuan ($11.6 million) for the first 9 months of last year, while JD.com reported a similar sized loss of 60 million yuan. JD previously said it turned profitable at the end of last year.

All that said, let's try to put a valuation on this deal. The most recent reports have valued JD.com, which controls about 17 percent of China's B2C e-commerce market, at anywhere from $8 billion to $15 billion. Market share for Tencent's Yixun is about a third the size of JD.com, so we could roughly say that Yixun's market value is about a third of JD.com, putting it at $3 billion to $5 billion. That would value the 10 percent of Yixun being acquired by JD at around $400 million. Thus after considering other assets being transferred and other intangible elements, the deal looks like Tencent will pay about $1 billion for its 15 percent of JD.com. That would value JD.com at a relatively modest $7 billion.

While the deal may not be the largest in terms of valuation, it is arguably the most significant in terms of broader market dynamics in China's fiercely competitive e-commerce sector. The new player would have a huge cash pool to boost its challenge to Alibaba, since Tencent is one of China's richest Internet companies and JD.com is also likely to get several billion dollars in new cash after its IPO. The pair would also have a major weapon in Tencent's hugely popular WeChat mobile messaging service, which is rapidly signing up new e-commerce users through innovative moves including a "red envelope" promotion during the Chinese New Year (previous post).

I would expect this tie-up to have an immediate impact on Chinese B2C e-commerce, and expect we could see the new company gain as much as one-third of the market by the end of this year. Much of those gains will probably come from other smaller players like Dangdang (NYSE: DANG), Suning (Shenzhen: 002024) Yihaodian and Amazon China (Nasdaq: AMZN). Feeling that pressure, I wouldn't be surprised to see 1 or 2 more major pairings by the end of this year, with perhaps Suning forming a tie-up with either Yihaodian or Amazon China.

Bottom line: Tencent's new tie-up with JD.com will create a new player that could win up to a third of China's B2C e-commerce market by year end, and is likely to accelerate consolidation in the sector.

Disclosure: No positions

Source: Tencent-JD Tie-Up Takes Aim At Alibaba