China internet players Dianping, Meituan agree merger

It is the second merger this year of competitors in China's O2O space following the unification of ride-hailing app operators Didi Dache and Kuaidi Dache. Both markets have been characterized by an aggressive fight for customers, with increasingly large funding rounds going towards subsidies or commissions.

The combined Didi Kuaidi entity completed a $3 billion round of funding in September at a valuation of approximately $15 billion - higher than the aggregated valuation of the two companies when they operated independently of one another. Dianping and Meituan, which closed their previous rounds of funding at valuations of $4 billion and $7 billion, respectively, are likely to follow a similar path.

The Dianping-Meituan merger, like the Didi-Kuaidi deal, also represents a unification of companies from either side of the competitive divide between Alibaba Group and Tencent Holdings. Alibaba Group was an early backer of Meituan while Tencent took a 20% stake in Dianping last year.

Dianping and Meituan have jointly set up a new company that is expected to run the leading O2O services platform in China, although both companies will retain their respective brands and management structures, and operate their businesses independently.

Founded in 2003, Dianping established itself as a provider of restaurant reviews and then group-buying services, making money through a combination of paid listings and discount offers. It subsequently introduced additional services such as instant payment, restaurant reservations, and take-out delivery. It has more than 200 million users and leverages its presence in 250 cities nationwide to cultivate new merchant relationships.

Meituan was set up in 2010 as new group-buying sites were emerging at a frenetic pace in China. When Meituan completed its Series B round in 2011 it trailed rivals Lashou and WoWo, but outlasted them by keeping its discipline and focusing on local services - consumer-related offers on hotels, restaurants and cinema tickets - rather than consumer goods. It has more than 130 million annual active purchasers and branches in 1,100 cities.

Both companies have broadened their businesses in ways that have added to the crossover. Dianping has moved into other lifestyle segments, including movies, lodging, entertainment and beauty. Meituan, meanwhile, has created hotel and tourism and home delivery verticals. Indeed, when Dianping completed its previous round of funding in April, it was expected to take the fight to Meituan by increasing penetration of third- and fourth-tier cities, where its rival has traditionally been stronger.

However, as a combined entity, they can leverage their respective strengths to develop service offerings and face down the challenge presented by other players. For example, a few months ago, Baidu said it planned to invest substantially in its own group-buying platform, Nuomi, as part of efforts to strengthen its exposure to the O2O services space.

"Over the years, although the two companies were competing and had different focuses, we enjoyed the same goal of helping 10 million merchants to better serve one billion consumers in China, and in this regard, our commonalities far outweigh our differences," said Zhang Tao, CEO of Dianping, in a statement. "We both recognize the enormous potential of China's O2O industry, and therefore this strategic cooperation was a shared, and almost inevitable, decision."

An investor in Dianping previously observed to AVCJ that the best case scenario for the company's backers would be a merger with Meituan to create a single, dominant player that could eventually be taken public. The worst case scenario was an acquisition by Tencent, which is said to have made several proposals.

Sequoia Capital was the first institutional investor in Dianping in 2006, with TrustBridge Partners, Lightspeed Venture Partners and Qiming Venture Partners joining over the next two rounds.

After paying an undisclosed sum for its 20% stake in early 2014, Tencent was the largest investor in an $850 million round - at a valuation of about $4 billion - that closed in April. Smart phone maker Xiaomi, FountainVest Partners, Temasek Holdings, Wanda Group, Fosun Group and Ascendent Capital Partners were also said to have participated.

Three months earlier, Meituan raised a $700 million round at a valuation of $7 billion. It did not identify the investors. Sequoia was also the company's earliest backer, in 2010, and then re-upped for the Series B a year later alongside Alibaba, Walden International and Northern Light Venture Capital. General Atlantic led the Series C last year with participation from Sequoia and Alibaba.

China Renaissance acted as exclusive financial advisor to both Dianping and Meituan in the merger transaction.

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