Marriage of Alibaba, Tencent-backed startups could pose threat to Baidu

Two Chinese startups separately backed by Alibaba Group Holding Ltd and Tencent Holdings Ltd have agreed to a merger that will create a $15 billion provider of local services such as restaurant reviews and movie bookings, according to sources with knowledge of the matter.

The combination of Meituan.com, part-owned by Alibaba, with Tencent-backed Dianping.com may be announced as soon as Thursday, the source said, asking not to be identified.

China's largest Internet companies are investing heavily in the $1.6 trillion online-to-offline services market, betting that the use of smartphones and tablets to book everything from hotel rooms to car rides will become mainstream.

Chinese users of location-based services could rise 29 percent to 400 million by 2017, according to Internet consultancy IResearch.

A Meituan-Dianping combination would pose a threat to Baidu Inc, which is investing $3.2 billion over three years in Nuomi, its own local services venture. Baidu Chief Executive Robin Li is trying to transform the search company into a provider of on-demand services.

"The two companies merging would allow them to have absolute dominance of the group-buying market, and require less cash burn," said Wang Weidong, an analyst at IResearch in Beijing. "They will be putting a lot of pressure on competitors."

There have been $58.4 billion of Internet deals involving Chinese companies this year, already almost double the amount for 2014, data compiled by Bloomberg show. Meituan recently completed a funding round that valued the company at about $10.5 billion, after originally seeking a valuation of as much as $15 billion, one of the sources said.

Often compared with Groupon Inc, Meituan is the leading player in a group-buying market worth 77 billion yuan ($12.1 billion) in the first half.

It accounted for 51.9 percent of Chinese group buying transactions in the first six months, according to a report by researcher Analysys International. Dianping accounted for 29.5 percent, followed by Baidu's Nuomi with 13.6 percent.