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Alibaba (NYSE:BABA) Offloads Stake in Meituan-Dianping

Alibaba group holding ltd

Alibaba Group Holding Ltd signed a deal estimated at $900 million to offload its investment in Meituan-Dianping, China’s biggest provider of online restaurant bookings, movie ticketing and a host of other on-demand services.

Alibaba group holding ltd

Meituan-Dianping, formed last year from a merger of two competing start-ups, was sold to a consortium of investors, some of which had assisted Meituan in its latest $3.3 billion funding round. Some of these investors include Tencent Holdings Ltd , Temasek Holdings Pte. Ltd and venture capital company DST Global.

Meituan-Dianping is now valued at $18.3 billion after the latest funding round. The company, whose services are similar to those of U.S. firms such as Yelp Inc. and Groupon Inc., announced Tuesday that its gross transaction volume totaled 170 billion yuan ($25.84 billion) in 2015.

Alibaba Desires to Scale its Own Company

Alibaba’s decision to sell the stake was informed by its decision to develop its own competing business, as well as the entry of its Chinese rival Tencent into Meituan-Dianping during last year’s merger.  Alibaba will now concentrate its energy and resources in developing its own competing startup called Koubei.

The move has been applauded by Alibaba investors, who believe there are limited scenarios with which the internet giant can collaborate with its rival Tencent. This is because Koubei (loosely translated into “word-of-mouth reputation” in the local Mandarin language) deals with online food deliveries, placing it in direct competition with Meituan-Dianping. Alibaba and its financing division have so far invested $1 billion in Koubei.

In contrast, Alibaba and Tencent have collaborated previously. For instance, two rival cab-hailing apps that are separately affiliated to the two internet giants fused to form one dominant firm. The deal was successful because the two firms don’t compete in that space, unlike in the case of Meituan Dianping, where Alibaba owns a rival company.

Most startups in China have folded up trying to entice users with promotional strategies such as subsidies and heavy discounts. However, Tencent and Alibaba have boasted their survival has been pegged on huge cash reserves and supporting offerings such as data, maps and payment platforms that ensure they remain ahead of their rivals.

Prefers Investing in Minority Stakes

Instead of building its own operations, Tencent has opted to buy minority shareholdings in other technology firms and then rely on the resulting collaboration to provide users with a wider range of services to choose from in its social-networking and messaging applications that have hundreds of millions subscribers. Its decision to invest in Meituan-Dianping is informed by such strategy.

Alibaba sold its stake at a discounted price that valued Meituan-Dianping at $12.5 billion. This contrasts with $15 billion paid by investors during the latest fundraising exercise, according to insiders. The discount was informed by the fact that Alibaba’s old shares had minimal downside-protection rights compared to the fresh shares issued in the new funding round.

Alibaba was advised by Credit Suisse Group AG  on the sale of its stake in Meituan-Dianping.

 

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