China's Tencent Holdings Ltd (HKG:0700) unveiled plans Monday to buy a 15% stake in JD.com for $215 million to take on rival e-commerce giant Alibaba.com Limited (HKG:1688). As part of the deal, Tencent plans to take another 5% after JD.com’s planned IPO.
Tencent’s acquisition ahead of JD.com’s IPO
As reported earlier, Tencent Holdings Ltd appointed Barclays PLC (NYSE:BCS) (LON:BARC) as an advisor for a possible purchase of a stake in JD.com Inc. The move was announced amid Tencent making heightened efforts to enhance its flagging e-commerce operations.
Tencent Holdings Ltd is best known for its WeChat messaging service, which boasts over 272 million monthly active users, largely in China. As of September 2013, JD.com had 35.8 million active customer accounts.
Despite having its own QQ Buy and 51Buy e-stores, Tencent Holdings Ltd has been struggling in its e-commerce ventures, though it has proven credentials in other areas like social media and gaming. It was felt that if the proposed deal comes to fruition, one or both of of Tencent's e-stores could be subsumed into JD.
As part of the deal announced Monday, Tencent will pay $214.7 million in cash and transfer its e-commerce businesses QQ Wanggou and Paipai and a minority stake in Yixun to JD.com.
Shenzhen-based Tencent has sought to build out its e-commerce business to better compete with Alibaba by combining messaging with services including shopping and gaming. Tencent also agreed in January to invest HK$1.5 billion ($193 million) in China South City Holdings Ltd., the owner of a logistics and warehouse network.
Signs of maturity
China's Internet market shows signs of maturing even as competition grows, and this deal continues a multibillion-dollar shopping spree by Chinese Internet companies over the past year to acquire and invest in smaller companies in pursuit of the country's more than 500 million smartphone users. Ran Wang, chief executive of China E-Capital Corp, a boutique investment bank, said: “In the past the Internet giants and top-tier targets have been seeing each other almost on a quarterly basis and it was an ongoing dialogue that never really stopped”.
Alibaba controls at least half of China’s online retail sales through its Tmall marketplace, while its Taobao service controls around 80% of consumer-to-consumer online sales. However, Alibaba has been losing ground to Tencent as smartphone and tablet usage surged over recent years. Analysts point out as a result of Tencent’s deal with JD.com, Alibaba, which is already losing ground to Tencent in mobile payments, will face greater challenges.