China O2O services platform Meituan-Dianping raises $3.3b

It is the largest the largest private round raised by an internet start-up globally, topping the $3 billion raised last year by Didi-Kuaidi, a ride-hailing service that was also the product of a high-profile merger. While the Didi-Kuadi investment was completed at a valuation of $15 billion, Meituan-Dianping is said to have reached $18 billion, up from an earlier valuation of $15 billion.

The company said participants in the round included Tencent Holdings, DST Global and Temasek Holdings. Tencent and Temasek have both been disclosed as investors in the companies prior to the merger.

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, while Meituan was set up in 2010 as a group-buying site. Both have to various degrees pushed into other segments of local services, such as hotel reservations, movie ticket booking and food delivery.

While the businesses are seen as complementary - for example, Dianping has traditionally been stronger in tier-one cities while Meituan is dominant in third and fourth tier locations - the merger was agreed against a backdrop of uncertainty about the sustainability of internet companies' business models. Investors have been reluctant to commit more capital to a battle for market share defined by how much can be offered in subsidies to consumers and merchants.

Indeed, after Meituan and Dianping completed funding rounds in early 2015 at valuations of $7 billion and $4 billion, respectively, Meituan is to have returned to the market seeking more capital at an ever higher valuation only to meet with a lukewarm response. Each company was reportedly burning through about $1 million per day.

As a combined entity with a market-leading position, Meituan-Dianping has been able to raise additional capital at a valuation in excess of the two companies' combined worth when they operated separately. According to local media, Meituan-Dianping is expected to achieve RMB184 billion ($27.9 billion) in gross merchandise value in 2015, rising to more than RMB1 trillion by 2019. An IPO is mooted for within three years.

At the same time, O2O services in China is increasingly competitive. Alibaba Group and its financial affiliate Ant Financial plan to invest nearly $1 billion in an O2O services venture called Koubei, while Baidu is also investing in the space as well as raising third-party capital for Baidu Delivery.

Furthermore, independent players like food-ordering and delivery platform Ele.me and 58 Daojia, which connects consumers with individual service providers ranging from plumbers to beauticians, have received substantial investment from private equity and venture capital firms.

The model is based on transaction frequency, which means 020 services platform must have enough people placing enough orders for the commissions earned by the platform to reach a reasonable amount. Alternatively, these platforms must attract sufficient users to suggest they can be profitable in the future, and therefore justify the subsidies paid out to build market share today.

Several other internet industry verticals have seen consolidation in the past few months on the basis that it removes ineffective competition. Online shopping and social networking platform Mogujie agreed to take control of rival Meilishuo, while mergers have been brokered between movie ticket-booking platforms Beijing Weiying Times Technology and Gewara and travel services players Ctrip and Qunar (although both are publicly listed).

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• Topics
• Greater China
• Expansion
• Technology
• TMT
• Consumer
• China
• Growth capital
• DST Advisors
• Temasek Holdings
• Tencent