Bottom line: Homestay specialist Tujia could make a play to merge with the China operations of Airbnb (Private:AIRB), following its major new tie-up with leading online travel sites Ctrip (NASDAQ:CTRP) and Qunar (NASDAQ:QUNR).
Leading online travel agent Ctrip is back to doing what it knows best, neutralizing competition through formation of savvy alliances with its rivals. In this case, the company is taking aim at the market for short-term stays at private homes, with its announcement of a major new tie-up with homegrown industry leader Tujia. That alliance is seeing Ctrip merge its own homestay business with Tujia, in what looks like a clear shot at global leader and sector pioneer Airbnb.
In a related headline, Ctrip's former major rival Qunar has just announced that its signing of a definitive agreement to take the company private, a deal that will leave Ctrip as one of its largest shareholders (company announcement). The theme is that Ctrip has become quite effective at taking major stakes in its former rivals, effectively coopting them into its own sphere of influence and greatly reducing competition in the process.
Ctrip's latest move in that direction will see it merge its homestay business with Tujia's (company announcement; Chinese article). It's no coincidence that the bigger deal will also see Qunar make a similar move by merging its own homestay business with Tujia's, since Ctrip and Qunar are now closely allied.
Announcement of the deal says Tujia will "receive a wide range of benefits from Ctrip and Qunar, including inventory, traffic, branding and operations support." That means the trio intend to work closely together to promote Tujia's services. No financial terms are given, but the nature of the announcement means it's quite probable that Ctrip and Qunar are getting an equity stake in Tujia in exchange for their assets and other support.
Announcement of the deal also contains the intriguing and quite vaguely worded proclamation that following the tie-up "more M&A may be coming to complete the industry chain." The only M&A that would seem to fit that definition would be an outright purchase of Tujia by Ctrip. But that seems somewhat unlikely due to Ctrip's preferred business model of neutralizing its opponents through equity tie-ups rather than outright acquisitions.
Eye on Airbnb
Regardless of how this particular relationship evolves, it's quite clear that Airbnb is the main target. Airbnb formally rolled out its China welcome mat just a year ago, working in partnership with 2 major local private equity partners, Sequoia Capital and China Broadband Capital (previous post). We haven't seen any real updates of how Airbnb has done in the market since then.
Meantime, Tujia also did its own capital-raising last year when it got $300 million in a new funding round. Reports at that time indicated that Tujia's other earlier investors included Ctrip, as well as the very same China Broadband Capital that helped to fund Airbnb's move into China. Other Tujia backers include US-based HomeAway (NASDAQ:AWAY).
China Broadband Capital's role as an investor in both Tujia and Airbnb China, combined with the intriguing latest comments on more M&A in the new Tujia-Ctrip announcement, raise the interesting possibility that Tujia may be actually contemplating a merger with Airbnb China. Such a merger might seem unusual and even unlikely due to Airbnb's recent arrival to the market and its own deep resources.
But Airbnb certainly wouldn't be the first foreign company to abandon a China Internet operation due to frustrations in the cutthroat market. Most recently, shared car services provider Uber (Private:UBER) gave up the market by agreeing to merge with homegrown rival Didi Chuxing. Global retailing giant Wal-Mart (NYSE:WMT) also recently merged its own struggling China e-commerce business with that of homegrown rival JD.com (NASDAQ:JD). Against that backdrop, a merger of Airbnb China with Tujia looks a little more likely, and I would probably peg the possibility of such a deal at around 50 percent.