HONG KONG－Alibaba Group Holding Ltd plans to lead an investment round of at least $1 billion in Ele.me, one of the largest players in China's food-delivery service sector.

People familiar with the deal said that funding from Alibaba and its financial arm, Ant Financial Services Group, will value Ele.me at between $5.5 billion and $6 billion.

The move will help Ele.me compete with a rival service backed by Tencent Holdings Ltd, people familiar with the deal said, requesting not to be named because the matter is private.

Once completed, the agreement would mark the country's second-largest startup fundraising effort so far this year.

It would be surpassed only by ride-sharing giant Didi Chuxing's $5.5 billion round of fundraising.

Alibaba is vying for supremacy with the Tencent-backed startup, Meituan Dianping, in a local services industry primed for growth.

This has come about as people turn to their smartphones or the web to order food, schedule beauty treatments and hire domestic helpers.

Sales of such services are expected to reach 7.28 trillion yuan ($1.1 trillion) this year.

Startup investments surged 40 percent to $6 billion in the first quarter, CB Insights, a research company, estimated.

While food-delivery businesses around the world have struggled to make profits, China's two largest internet companies see on-demand services as a way to promote their lucrative online payments services.

Growth in domestic food and restaurant transactions has also outstripped many other retail segments in the world's second-largest economy.

Alibaba is already the biggest shareholder of Ele.me, which it uses to complement a separate service called Koubei that provides restaurant bookings and spa treatments.

Now, Tencent intends to ramp up investment to catch up with its rival.

It holds only a minor stake in Ele.me after a $1.25 billion fundraising from Alibaba and Ant Financial in April 2016 diluted its holdings.

The company, valued at about $4.5 billion at the time, had discussed a merger with Meituan, one of Tencent's largest investments in the market.

But talks fell apart, people familiar with the matter said.

Tencent is now "putting up quite a big initiative around the restaurant vertical" to propel WeChat Pay, Martin Lau, the company's president, told analysts on a post-earnings conference call earlier this month.

The online giant had lost market share in restaurants but is "putting aside a pretty good budget to get back on the competition front", according to Lau.

BLOOMBERG