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Tencent's GroupNet: a group buying consolidator
GroupNet's role as consolidator in China's group buying space could grow, backed by its strong ties to Tencent and following its raising of $40 million in new funds for acquisitions.
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The long awaited clean-up of China's cluttered group buying sector appears to be accelerating, with new reports that a potential cash-rich consolidator has emerged in the form of GroupNet, which is itself the product of the merger earlier this year between former mid-sized players FTuan and Gaopeng. The new reports say that GroupNet has raised $40 million in new funds, which it will use to acquire other companies in the money-losing space where many players are now on life-support after burning through hundreds of millions investors' dollars over the last two years.
Industry watchers will recall that another mid-sized site called 24Quan shuttered its operations early last week amid a dispute between its managers and investors, with a message on the site claiming the closure was "temporary" until the impasse could be resolved. Reports emerged later in the week quoting GroupNet's CEO Lin Ning saying he had been approached by one of 24Quan's investors about buying the company, and that he was in talks about a possible acquisition.
The latest reports cite Lin saying that his company recently raised the $40 million acquisition warchest, and that 24Quan was indeed one of the companies he was eyeing for possible acquisitions. I previously said that GroupNet indeed could emerge as a consolidator for the struggling group buying sector, since its biggest stakeholder is none other than the cash-rich Tencent (0700.HK), China's biggest Internet firm by market capitalization. Among GroupNet's three original assets, QQ Tuan and FTuan both counted Tencent as their controlling stakeholder, while Gaopeng was a 50-50 joint venture between Tencent and US group buying pioneer Groupon (Nasdaq: GRPN).
The latest media reports don't cite Lin saying who provided this latest $40 million in new funds; but I wouldn't be surprised if most or all of the money came from Tencent, which has lots of cash and can now use GroupNet as a base to try and build China's first profitable group buying company.
Of course the irony in all this is that the $40 million in GroupNet's warchest is a pittance compared to the massive amounts of money that investors have poured into group buying sites over the last two years. The frenzy reached a climax in early 2011 when two of the industry's leaders, LaShou and 55tuan, raised $111 million and $200 million, respectively as investors all tried to bet on who would become China's next Groupon. The list of investors at that time included a number of big names, such as Goldman Sachs (NYSE: GS) for 55tuan, and London's Milestone Capital Partners for LaShou.
But much has changed since the zenith of the frenzy, with LaShou making several attempts at an IPO to raise desperately needed cash while 55tuan at one point was reportedly failing to pay some of its suppliers. It's unclear how much a big name like LaShou or 55tuan might sell for at this point, though I suspect that both companies have little or no cash left and perhaps could sell for as little as $20 million.
That could be good news for GroupNet or Dianping, China's equivalent of US restaurant ratings giant Yelp (NYSE: YELP), which is one of the few profitable companies that may also be in the market for group buying acquisitions. Dianping also raised a new $60 million in funds back in August, though it didn't give any details on its intent for the money.
Obviously GroupNet, Dianping or any other acquirer will need to move carefully to avoid buying assets that are beyond redemption and could ultimately pull down their own healthier operations. But I expect that 24Quan, LaShou and 55tuan all have potentially valuable assets to offer for a savvy acquirer, and we could see as many as two or three major deals announced by the end of the year.
Bottom line: GroupNet's role as consolidator in China's group buying space could grow, backed by its strong ties to Tencent and following its raising of $40 million in new funds for acquisitions.
The opinions expressed in this article are the author's own. To read more commentaries from Doug Young, click on youngchinabiz.com