Baidu, Tencent Drive Deeper Into Bitauto

| About: Baidu, Inc. (BIDU)

The past week has been a turbulent time for China's "Big 3" Internet companies, which have been thrown into uneasy partnership with the surprise mega merger between hired car services leaders Didi Chuxing (Private:DIDI) and Uber's (Private:UBER) China operations. Now a new wrinkle has emerged in an unusual story that made headlines in June, when two of the Big 3, Baidu (NASDAQ:BIDU) and Tencent (OTCPK:TCEHY), jointly invested in Bitauto (NYSE:BITA), a provider of car-related online services. The latest development is seeing Baidu and Tencent co-invest again in a car financing venture backed by Bitauto.

The wave of mergers sweeping China's Internet over the last 2 years has often made strange bedfellows of the nation's Big 3 Internet companies, Baidu, Tencent and e-commerce giant Alibaba (NYSE:BABA). Tencent and Alibaba were backers of different companies that merged last year to form the current Didi Chuxing, while Baidu is a major backer of Uber.

That means all 3 companies will become stakeholders if the merger between Didi Chuxing and Uber China goes through, in a deal that would create a $35 billion company with the big majority of the Chinese market for private car services. Among those Big 3, Alibaba and Tencent are easily the largest, with market values of about $200 billion. They are also quite adversarial due to very different styles of their founders.

By comparison, Baidu and Tencent have a more neutral relationship, and perhaps even see the opportunity to work together outside their core areas of online search and social networking (SNS), respectively. That certainly seemed to be the case when that pair announced last month that they were joining a group that would invest $300 million in Bitauto. (previous post)

Deepening Partnership

Now it seems that investment was just the opening to a bigger strategic tie-up, with this latest announcement that the pair will join a group investing in $550 million in Yixin Capital, a car financing venture set up by Bitauto. (company announcement) Following the investment, Bitauto says it will hold 47 percent of Yixin Capital and a majority of its voting power.

In addition to Baidu and Tencent, e-commerce giant (NASDAQ:JD) will also invest in Yixin. That trio were all involved in the $300 million investment in the original Bitauto investment announced last month, with each contributing $50 million. This new investment looks a bit larger for each of the companies, perhaps totaling around $100 million apiece, though no specific amounts were given.

The move is certainly consistent with recent investment trends for both Baidu and Tencent, and also continues a broader trend that has seen all of the Big 3 Internet companies pile into financial services. Tencent usually prefers to buy strategic stakes of up to 30 percent in partners whose products and services it can promote on its social networks. Baidu has also shown a recent preference for spinning off non-core units, allowing it to focus on its main search business.

All that said, the deepening of this young alliance between Baidu and Tencent is probably the most interesting element of this new investment. The amounts are still relatively small, especially when one considers the billions of dollars in deals coming out of China's Internet these days. But the fact that Baidu and Tencent are actively deepening their cooperation in such an outside investment hints at a sort of pilot experiment that perhaps could be replicated if the relationship goes smoothly.

The pair own complementary non-core assets in a number of other areas that could theoretically be merged into standalone independent companies. One of the largest is online video, where Tencent owns a major service and Baidu is also trying to spin off its competing iQiyi unit. Another is take-out dining services. I wouldn't expect to see any major mergers of those assets this year, but it's quite possible some tie-ups could come down the road in 2017 if this growing partnership with Bitauto shows that Baidu and Tencent can work well together.

Disclosure: None.

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