An employee at a Dicos outlet, a Western-style fast-food chain, in Zhengzhou, Henan province. The food chain has teamed up with Meituan, a group-buying service promoted by e-commerce giant Alibaba Group Holding Ltd. [Photo/China Daily]

Consolidation moves in online-to-offline sector will end price war between firms

Two of China's biggest online-to-offline, or O2O, service providers, backed separately by rivals Alibaba Group Holding Ltd and Tencent Holdings Ltd, decided to join hands on Thursday to create a formidable giant and end bitte price wars.

Meituan.com, a group-buying site backed by Alibaba, and consumer review service Dianping.com, which is funded by Tencent, said in a joint statement that they have decided to go in for a strategic merger.

The new company, valued at $15 billion, will be run on a co-CEO and co-chairmen basis. Meituan and Dianping will retain the original structure of their respective human resources, and run their businesses separately while retaining their independent brands.

Zhang Tao, CEO of Dianping, said: "Cooperation is the big trend. We will leverage our resources to help 10 million merchants better serve 1 billion consumers."

The online-to-offline service market in China is expected to become a 7.2 trillion yuan ($1.13 trillion) industry by 2017 from the current 6 trillion yuan, according to a report from Beijing-based Internet research firm iResearch Consulting Group.

It is not immediately clear what the equity ratio of the new company will be. But the deal is expected to create a strong competitor to Baidu Inc, which promised to invest $3.2 billion over three years in its own O2O service platform Nuomi.

Gene Cao, a senior analyst at market research firm Forrester Research Inc, said the move comes as the country's crowded O2O sector finds it increasingly hard to attract venture capital.

"Meituan and Dianping are under heavy financial pressure given the amount of cash they have invested to lure consumers. But with the country's economy slowing, investors become reluctant to pump money into the sector.

"The tie-up matches the expectation of investors and would help in better channeling of resources from fighting against each other. It also allows the firms to explore new businesses," Cao said.