Tencent Makes Travel Mates of eLong, Tongcheng

Just days after reports emerged that China's top two online travel agents were in talks for a potential merger, rivals eLong (NASDAQ: LONG  ) and venture-backed Tongcheng have announced their own new tie-up that could be a prelude to a similar marriage. In an interesting twist, this newest deal looks like it's being engineered behind the scenes by Tencent, China's leading Internet company, also a major stakeholder in both eLong and Tongcheng. Such a dynamic would be similar to the bigger deal that emerged earlier this week, which could see leading online search firm Baidu orchestrate a much larger merger between Ctrip (NASDAQ: CTRP  ) and Qunar (NASDAQ: QUNR  ) .

This latest deal between eLong and Tongcheng looks quite exciting, as it brings together a number of players with major resources to potentially create a company that could seriously challenge Ctrip, Qunar, or both. eLong's top shareholders include not only Tencent, but also Expedia, a top U.S. online travel agent. Tongcheng's most important strategic partner is also Tencent, which became a major investor when Tongcheng received $85 million in new funding in Feburary. 

According to their joint announcement, eLong and Tongcheng have signed a formal strategic cooperation agreement that will initially see them cross-promote each other's products. eLong will become the exclusive provider of agency hotel and group-buy hotel inventory for Tongcheng, and Tongcheng will become the exclusive provider of scenic attraction ticket inventory for eLong.

The announcement doesn't contain much more detail, but Chinese media claim the partnership was engineered by Tencent, which wants to carve out its own place in the lucrative, but highly competitive, market for online travel services. Tencent has assumed this kind of role in a number of other recent deals, often buying large strategic stakes in companies whose products can complement its own core online game and social networking services.

Rethinking the wisdom of independence
Tongcheng has previously said its long-term plan is to remain independent and make its own eventual IPO. But, the company and its investors might be rethinking that position now, following a flurry of reports this week saying Ctrip and Qunar were negotiating an equity tie-up that could see the pair eventually merge. Such a deal would leave Baidu as the controlling shareholder of a new company, which would have a market value of about $10 billion. Baidu is already Qunar's controlling shareholder, and Qunar and Ctrip have also previously worked together on cross-promotional projects.

This latest tie-up between Tongcheng and eLong is obviously still quite early, but it could easily turn into an outright merger if the pair work well together and Tencent and other investors apply some pressure in that direction. This kind of consolidation is sorely needed in China's online travel space, which has become cluttered with a number of promising start-ups in recent years. A Tongcheng-eLong combination would be far smaller than either Ctrip or Qunar, since eLong is worth only $550 million and Tongcheng is almost certainly worth even less.

Final thoughts
The most exciting things about this potential new merger are Tencent's participation, and also the addition of a youthful, innovative company like Tongcheng. eLong is one of China's oldest online travel firms, and yet is still a tiny fraction of Ctrip's size despite years in the industry and backing from Expedia. Tencent and Tongcheng could quite possibly have the resources and innovative spirit to finally unlock a bit more of eLong's potential, providing a serious new player to finally challenge Ctrip.

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