Alibaba Escalates Attack on Meituan Ahead of Rival's IPO

(Bloomberg) -- Jack Ma is used to fighting on many battlefronts. Now he’s concentrating his firepower on being the last one standing in food-delivery and online services in China.

Ma’s Alibaba Group Holding Ltd. is merging its Ele.me and Koubei units and injecting it with more than $3 billion from a funding round led by SoftBank Group Corp. That will give it more ammunition to take on rival Meituan Dianping as it tries to seize control of China’s $1.3 trillion food delivery and online services industry.

The funding couldn’t come at a worse time for Meituan Dianping, which is backed by Tencent Holdings Ltd. and offers food delivery, movie ticketing and travel bookings. Meituan is aiming to go public, but since it filed for a Hong Kong initial public offering in June, Asian equity markets have tanked and tech IPOs from the likes of Xiaomi Corp. have underwhelmed investors.

Those considering Meituan’s IPO will now have to weigh its prospects in a costly battle with China’s most valuable company. Ele.me had already broadcast plans to spend $443 million in the third quarter, en route to winning more than half of the market. A surge of funding and support from deep-pocketed backers like Alibaba and SoftBank promises to drag it into a subsidy and discount war.

The business is “a must-win and a must-have for us,” Maggie Wu, Alibaba’s chief financial officer, said in a conference call with investors after earnings. “As Chinese consumers demand more quality and diversity of services, this provides us with a $1 trillion opportunity.”

Meituan just won Hong Kong stock exchange approval for its planned IPO, which could raise more than $4 billion, people with knowledge of the matter said. The company plans to seek a valuation of $50 billion to $55 billion, the people said, asking not to be identified because the information is private

Meituan’s IPO filing showed a company growing rapidly but also hemorrhaging cash. The company lost $2.9 billion in 2017 and also showed that its revenue is growing faster than the amount of food, travel and other goods and services consumers are buying on its platform. That suggests it’s taking a bigger slice in commissions from merchants such as restaurants, rather than from its customers.

“Meituan wants to get ahead of cooling capital markets with an IPO as quickly as possible, especially after its first public filing revealed financial losses and business strains,” said Counterpoint analyst Flora Tang.

Founder Wang Xing’s recent attempt to take on Chinese ride-hailing giant Didi Chuxing and expand into new fields has also fallen short as deep subsidies weren’t enough to permanently draw riders and drivers to Meituan, Tang said.

“Meituan’s struggles provide Alibaba with the opportunity to put more resources behind Ele.me at just the right time, so it can compete more aggressively with Meituan and attract more merchants and users," Tang said.

Both Alibaba and Meituan are tapping into the demographic changes sweeping China as an increasing urban population means more consumers are eating outside their homes and paying more for services. Accessing that spending will be essential in fueling growth at Alibaba and Tencent, the giants of the country’s technology sector trying to expand their dominance of the online world to the offline realm.

Already, 13 percent of China’s $1.3 trillion food retail and service industry is online and that’s expected to increase to 29.5 percent by 2023, according to iResearch.

Meituan and Ele.me have squeezed most other competitors out of the game through price wars or acquisitions, including search giant Baidu Inc.

Alibaba’s feud with Meituan stretches back years. Wang initially received funding from Alibaba after starting the the company in 2010. But a falling out with the e-commerce giant ensued when Wang agreed in 2015 to merge with Tencent-backed rival, Dianping, without Alibaba’s blessing. Instead of retaining its stake in the merged company and cooperating with its arch-enemy, Alibaba sold most of its shares to refocus on Koubei and its investment in Ele.me.

The merger emboldened Meituan, which expanded its menu of offline services and provided Tencent with a profitable way to cash in on everything from food delivery and bike rides to ride sharing and travel services.

Alibaba responded in April by taking full ownership of Ele.me at a valuation of $9.5 billion. More cash from SoftBank and Alibaba will only ratchet up the competition.

©2018 Bloomberg L.P.