Chinese internet giants Alibaba (NYSE:BABA) and Tencent (OTC:TCEHY) are changing tack and making a bet on brick-and-mortar with Alibaba taking a 36% stake in "hyperstore" (a mix of grocery and department store) company Sun Art Retail Group back in November, and Tencent taking a 5% stake in Yonghui Superstores shortly thereafter.
Tencent continued the shopping spree last week with another high-profile investment, announcing they were buying a stake in commercial property developer Dalian Wanda Commercial Group and it seems to be buying a stake in Wanda at a great price.
What is Wanda?
The Wanda Commercial Properties Group is a subsidiary of Wanda Group, a holding company run by Wang Jianlin, one of the richest men in China. The commercial property unit builds Wanda Plazas, which are town centers incorporating shopping, entertainment, and Wanda hotels into a single site. The company has built roughly 287 Wanda Plazas around China as of the end of 2017.
Wanda Commercial Property Group used to be listed on the Hong Kong exchange but recruited an investor group to buy a 14% stake in the unit, in order to de-list it in 2016, with the idea that the company would eventually relist in Shanghai, where valuations were higher. However, Wanda faced a deadline to relist this coming year, and thereby needed help if it wanted the option to stay private longer.
An investor group led by Tencent, JD.com (NASDAQ:JD), appliance retailer Suning, and property developer Sunac China Holdings Ltd. (which had already purchased Wanda's theme park unit) decided to acquire that 14% stake for a 20% premium to the prior group, at roughly $5.4 billion. While buying out prior investors at a premium, the Tencent-JD group is paying just over book value, which is a significant discount to other property development firms in China.
The reason for the discount is that both the Chinese government and ratings agencies have voiced concerns about the Wanda Group's foreign investments, notably in American film producer Legendary Entertainment and theater operator AMC Entertainment (NYSE:AMC), as well as its significant debt load, of which about $1.5 billion is coming due in May. In addition, former investors involved in the de-listing would have been entitled to get bought out at a 10% premium by September, if there were no IPO.
Tencent and JD's investment alleviates both concerns, as the purchase enables Wanda to avoid having to worry about the debt payments or to rush a relisting by September. Now, with Tencent's backing, a relisting in Shanghai may also get a much higher valuation just because of Tencent's involvement in the unit.
So, even without any sort of strategic integration between the two companies, Tencent looks as if it will make money on the investment as a late-stage private investor. And Tencent's "super app" WeChat may be able to leverage purchase data gleaned from Chinese customers online and in Wanda Plazas to better target consumers via digital ads. Tencent is also looking to boost usage of Tenpay, which is Tencent's mobile payment solution, a close No. 2 to Alibaba's rival Alipay payment service, and the Wanda purchase could help with that as well.
Tencent eats China
Tencent and Alibaba, each with wonderful, capital-light core businesses, seem to be in a race to reinvest as much money as possible in the Chinese economy and integrate various acquisitions -- plus data they generate -- into their core platforms. Tencent also seems to be very adept at using its considerable clout to make deals at discounts from where these businesses would otherwise trade.
With the Wanda acquisition, Tencent added to the new stakes in Yonghui, and its stakes in the No. 2 and No. 3 Chinese e-commerce platforms JD and Vipshop, in a bid to seemingly consolidate the big Chinese commerce platforms -- both online and physical -- outside of Alibaba under its indirect control.
The Wanda stake seems like another good deal for Tencent, which is starting to look more like an investment holding company, akin to a tech version of Warren Buffett's Berkshire Hathaway. Investors should take note of Tencent and rival Alibaba as they bid to consolidate much of the Chinese economy under just two corporate powerhouses.