JD, Tencent Cement Ties With Bitauto Buy

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Includes: ATHM, BITA, JD, TCEHY
by: Doug Young

Bottom line: The sale of a major stake in Bitauto (NYSE:BITA) reflects a growing alliance between buyers Tencent (OTCPK:TCEHY) and JD.com (NASDAQ:JD), and could be followed by a similar sale of a stake in Bitauto rival Autohome.

A newly announced deal that will see Internet giants Tencent and JD.com buy nearly a third of online auto specialist Bitauto (BITA) is filled with intriguing implications for China's consolidating online sector. The deal further cements a growing alliance between Tencent, China's largest social networking (SNS) operator, and JD, the second largest e-commerce firm. At the same time, the tie-up with Bitauto has fueled speculation that the country's other major listed online car specialist, Autohome (NYSE:ATHM), could become an acquisition target by one of China's other leading Internet firms.

Let's begin with a look at the newly announced deal, which will add Bitauto's online auto services to the growing JD-Tencent alliance that began taking shape last year in the run up to JD's $1.8 billion Nasdaq IPO. Under the latest deal, JD.com will ultimately end up with 25 percent of Bitauto's shares, while Tencent will get 3.3 percent of the company (company announcement).

JD will invest $400 million in cash and provide another $750 million to Bitauto, and will receive $1.15 billion worth of newly issued Bitauto shares. Tencent will invest a more modest $150 million for its stake, and will also receive newly issued shares. Tencent and JD also will invest another $100 million and $150 million, respectively, in newly issued shares of YiXin Capital, Bitauto's car financing unit.

Tencent and JD will purchase their newly issued Bitauto shares at $73.31 apiece, representing a hefty premium to Bitauto's price the day the deal was announced. Of course it's worth noting that Bitauto shares were trading at $70.41 at the end of last year and have risen 27 percent over the last six trading days, indicating word of the deal was probably in the market during that time. The shares could be set for a pullback in the next few days, since their current level is now 21 percent ahead of the Tencent-JD purchase price.

The deal marks a major accomplishment for Bitauto, which will get to maintain its independence while bringing in major new partners in the form of two of China's leading Internet companies. The Tencent-JD alliance began taking shape last year, when the former purchased 15 percent of the latter (previous post).

Since then the pair have merged their e-commerce operations, and Tencent also has launched an exclusive shopping channel for JD on its hugely popular WeChat mobile instant messaging platform. Tencent also increased its holdings in JD by buying more shares at the time of JD's IPO, and also when JD made a secondary share offering last month. As a result, Tencent now owns more than 20 percent of JD.

This latest Bitauto alliance appears to further cement the growing ties between JD and Tencent, and I wouldn't be surprised to see more similar tie-ups in the future. The ultimate end could even see Tencent boost its stake in JD to a controlling share, though that could still be at least four or five years away.

Meantime, shares of Bitauto's closest rival, Autohome, also jumped by 7.6 percent after the latest deal was announced. That indicates investors believe Autohome could also form a similar tie-up, most likely with Tencent's top rivals Alibaba (NYSE:BABA) or Baidu (NASDAQ:BIDU). Alibaba previously made a similar move in the auto space with its purchase of mapping specialist AutoNavi last year, and I would put the chances high that it or Baidu could form a similar alliance with Autohhome later this year.

Disclosure: None.

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