China internet duo join forces against common foe

March 10, 2014

By Peter Thal Larsen and Robyn Mak 

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Two of China’s internet companies are joining forces against their common foe: Alibaba. Tencent is injecting its also-ran e-commerce units and $215 million in cash into JD.com for a 15 percent pre-IPO stake in the online retailer. More importantly, the two will collaborate on mobile commerce. Both have the same objective: erode Alibaba’s dominant market share.

Despite being one of China’s largest internet companies, Tencent is a marginal player when it comes to selling goods online. The two businesses it is transferring to JD.com have net assets of just 398 million yuan ($65 million) and lost a combined 71 million yuan in the nine months to last September. Rather than sink more money into the businesses, Tencent has decided to throw its weight behind China’s second-largest internet retailer.

On the face of it, Tencent is getting a bargain for its 15 percent stake in JD.com: the combined value of the cash and the assets is just $280 million, implying a skimpy $1.87 billion valuation. However, the real worth, which is harder to measure, is in the collaboration between the two companies. First, Tencent will direct users from its social network platforms and WeChat messaging app to JD.com’s services. Second, shoppers will be able to use WeChat’s mobile payment system to pay for their purchases.

The endorsement from Tencent, which has agreed not to sell its shares for three years, provides a welcome boost to JD.com as it gears up for its initial public offering. Despite its scale and rapid growth, the business is in the red and needs external financing to keep going. Moreover, Tencent has agreed to buy a further 5 percent stake in the IPO, and may well add to its shareholding over time.

For Tencent, it’s a further sign that the company is seeking out allies in a broader battle. Alibaba dominates online retailing in China with an 80 percent share of consumer-to-consumer transactions, and last year bought a stake in Sina Weibo, the popular microblogging platform. In the struggle between the two internet giants, it will be increasingly hard for others to remain neutral.

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