An ongoing consolidation in the crowded online travel space has taken a new twist, with word that industry leader Ctrip (NASDAQ:CTRP) has made a major investment in up-and-comer Tongcheng and is eying a similar tie-up with IPO candidate Tuniu. The latest news comes from one official announcement on Tongcheng and another media report on Tuniu, showing just how active the online travel space has recently become due to the entry of several new players over the last few years. All of this comes just weeks after Ctrip was reportedly in talks to merge with Qunar (NASDAQ:QUNR), the sector's second-largest player, in a deal that would have created a sector leader with a market value of around $10 billion.
So, what exactly is going on here? Obviously, I can only guess, since I'm not privy to any behind-the-scenes negotiations. But I suspect that Ctrip's fiercely independent management team was reluctant to give up control to Qunar, which was almost certainly a condition for any merger between that pair. What's more, the Ctrip team quite possibly realized that a merger with Qunar could raise serious anti-trust concerns, meaning a deal might have been vetoed by China's anti-monopoly regulator.
All that said, these 2 potential tie-ups with Tongcheng and Tuniu look a bit more logical for Ctrip. On the one hand, neither deal looks like an outright merger, which would allow Ctrip's current management to stay in control of its own operations, while having strong influence over Tongcheng's and Tuniu's development. This kind of 3-way tie-up would also be far less likely to draw attention from the anti-monopoly regulator, since Tongcheng and Tuniu are far smaller than Ctrip or Qunar.
All that said, let's look more closely at the latest headlines, starting with Ctrip's announcement that it has agreed to pay $200 million for a stake in Tongcheng's main LY.com service, an online ticketing site (company announcement). Ctrip says it will become LY.com's second-largest stakeholder, but doesn't get more specific.
Meantime, a separate media report cites unnamed sources saying that Ctrip has agreed to take a 30 percent stake in Tongcheng (Chinese article). That report says Ctrip will become Tongcheng's second-largest investor, leading me to believe that this report and the official company announcement are one and the same deal. In effect, it appears that Ctrip has taken a 30 percent stake in Tongcheng via its investment in the company's main website, LY.com. Tongcheng recently formed another alliance with Ctrip's longtime rival eLong (NASDAQ:LONG) (previous post), and the report adds that this new tie-up will give Tongcheng a year to decide which partner it wants to travel with over the longer term.
The same report also says Ctrip is in talks to buy a stake in Tuniu, which is inching closer to its own IPO. Media reported in January that Tuniu had hired 2 investment banks to underwrite a New York IPO, and was hoping to raise up to $100 million (previous post). This latest report indicates that Tuniu is moving ahead with the plan, despite a rapidly cooling market, and is hoping to generate some buzz with a major new investment from an industry leader like Ctrip.
From a broader perspective, I quite prefer this latest approach by Ctrip to the earlier possibility of a merger with Qunar. Ctrip has always been one of the most focused and best-managed players in China's Internet space, and these new tie-ups with Tongcheng and Tuniu will allow it to stay in control of its own destiny. This kind of alliance is also less likely to attract anti-trust attention, and could firmly consolidate Ctrip's place as China's leading online travel agent.
Bottom line: Ctrip's new tie-ups with Tongcheng and Tuniu looks like a better strategy than a merger with Qunar, and could consolidate its place as China's leading online travel agent.