Wanda Challenges Ctrip With Tongcheng Merger

Summary

Tongcheng's merger with Wanda's travel unit could create a strong new rival to counter Ctrip.

It could become even stronger through a potential future tie-up or merger with HNA-backed Tuniu.

With Wanda's backing and its earlier capital raising last year, Tongcheng appears to be well funded to fight a longer-term battle with Ctrip.

For more than a year Internet giant Ctrip (NASDAQ:CTRP) has seemed almost invincible, buying up most of its major rivals one by one to consolidate its position as the nation's leading travel agent. But the company may finally be coming up against a major rival in its bid to dominate the lucrative sector with word that real estate and entertainment giant Wanda has bought up Tongcheng, one of Ctrip's last remaining major rivals.

This particular tie-up is slightly unusual as Ctrip previously invested around $200 million for a stake that was reportedly as high as 30 percent in Tongcheng, according to media reports a couple of years ago (previous post). That would have valued Tongcheng at about $650 million, which is a fraction of the valuation of more than 20 billion yuan ($3 billion) that Tongcheng was worth, based on the latest investment by Wanda.

The emerging picture is a bit cloudy, especially since Ctrip is famous for taking major stakes in its rivals to neutralize them without buying them outright. But Wanda and its business-savvy founder Wang Jianlin have previously expressed a desire to build up their travel services business, and I doubt that means simply co-investing with Ctrip.

We'll return to the bigger picture shortly, but first let's review the latest news that has seen Tongcheng announce a reorganization that resulted in its merger with Wanda's travel business (English article, Chinese article). Tongcheng said at the same time that its capitalization would increase by 1 billion yuan and that its own management would remain in charge of the company created through the merger.

There's no word of how much Wanda invested, if anything, in this latest tie-up. Wanda invested in Tongcheng last year when it provided more than half of a new funding round worth 6 billion yuan, or nearly $1 billion (previous post). Reports at that time pointed out that Internet giant Tencent (OTCPK:TCEHY) also invested in that round, but that Ctrip's name was absent from the list. That led some to speculate that Tongcheng was trying to distance itself from Ctrip and this latest Wanda merger could be further evidence of such a move.

With all that background in mind, as well as this latest Wanda merger, let's try next to figure out what's happening now. As I've said already, Wanda has previously stated its desire to get into the online travel business and has made some small acquisitions since formally setting up a travel subsidiary three years ago. But clearly it needs to make some larger purchases if it wants to become a serious player in the space.

Buyout Rivals

Next there's Ctrip, which has quietly gobbled up some of its largest rivals over the last two years, most notably the massively money-losing Qunar (NASDAQ:QUNR) as well as longtime rival eLong. Ctrip also previously invested in Tuniu (NASDAQ:TOUR), the only other overseas-listed online travel agent.

But in a surprising development, Tuniu rejected Ctrip in a $500 million funding round last year through a new share issue, opting instead to sell the stake to HNA, another tourism-focused major private equity investor (previous post). Thus one could interpret this latest Wanda investment in Tongcheng as a similar rejection of Ctrip and its growing clout in the online travel space.

Both HNA and Wanda are extremely wealthy companies with plenty of cash and access to credit that should help Tuniu and now Tongcheng continue to resist Ctrip's attempts at market domination. Reflecting the tough market, Tuniu announced a net loss of 780 million yuan in its latest reporting quarter, more than double the loss the previous year.

With Wanda's backing and its earlier capital raising last year, Tongcheng appears to be well funded to fight a longer-term battle with Ctrip for a share of China's booming market for travel services. A more intriguing possibility also could see Tongcheng and Tuniu potentially unite in a strategic tie-up or even a merger, which would create a potent rival to Ctrip with strong backing from HNA and Wanda.

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