An unexpected journey

Messy deal calls truce in China online travel war

Two bitter adversaries in China's online travel war are joining forces in a messy deal. Market leader Ctrip is teaming up with Qunar through a $3.4-billion share swap with search engine operator Baidu, which controls its smaller rival. But by stopping short of a full merger the two have left shareholders guessing at the value created by the alliance.

The $13-billion Ctrip dominates the country's jet-fuelled online travel market. Transactions are set to hit $56 billion by the end of the year, up more than 28 per cent from last year, according to iResearch. Yet the industry is engaged in costly price wars involving discount coupons. This has squeezed profitability. Ctrip's operating margin was just 2.3 per cent in the quarter ending June, down from 15 per cent in the same quarter just two years ago. Similarly, revenue at the $5.4 billion Qunar more than doubled in the recent quarter, year on year, but the company is still making a loss.

The ceasefire is the latest example of rivals joining forces in China's fiercely competitive internet sector. But the Ctrip-Qunar alliance is more convoluted than previous deals which brought together competing taxi-hailing apps and discount websites. Baidu is effectively swapping its majority stake in Qunar for a 25 per cent shareholding in Ctrip at a 36 per cent premium to the pre-announcement price. In return, Ctrip gets a 45 per cent voting stake in Qunar and four board seats. Analysts at HSBC reckon the two will handle 61 per cent of China's online air tickets and over 40 per cent of hotel bookings on the web.

It's not clear why the share swap is preferable to a straightforward merger. Ctrip and Qunar will continue to operate as separately listed entities, making synergies hard to pin down. Yet investors hailed the deal, adding roughly $2.7 billion to their combined market values.

Concerns of regulatory scrutiny may have been a factor. By keeping its voting stake in Qunar below 50 percent, Ctrip should avoid a review by the country's competition watchdogs, according to a person familiar with the matter. Baidu's minority stake gives it an option to take full control down the road. For investors, even a messy truce is better than none.