June 15, 2020 / 7:34 AM / a month ago

Breakingviews - Tencent’s China car deal defies and disappoints

Cars drive on the road during the evening rush hour in Beijing, China, July 1, 2019. Picture taken July 1, 2019. REUTERS/Jason Lee

HONG KONG (Reuters Breakingviews) - Tencent is driving a deal that both defies and disappoints. A consortium led by the Chinese internet giant has agreed to buy New York-listed car comparison site Bitauto for $1.1 billion, the same price it proposed months ago. Globally, buyers have tried to cut lower prices on deals etched out before the pandemic. But the outlook for China’s auto market is rosier than before. From that perspective, Tencent is getting a bargain.

Bitauto has had a bumpy ride since its 2010 debut. Shares peaked at nearly $100 in 2014, the year before e-commerce giant JD.com and Tencent agreed to plough $1.6 billion into the company. But competition and a weakening domestic economy subsequently contributed to a years-long slide. Shares were changing hands for just $13.75 before Tencent offered to buy the company for $16 a share in September, a meager 16% premium to its last closing price. The deal went quiet as the pandemic took hold but is now back on and broadly unchanged.

A lot has improved for the better for car dealers since, however. Auto sales in China fell for 14 consecutive months leading up to the initial offer. And then the coronavirus further dented sales. But a 4.4% year-over-year rebound in April ended a terrible run, and 2.19 million units were sold in May, according to the China Association of Automobile Manufacturers, up 14.5% from a year earlier. Pent-up demand and promotions helped. If Chinese authorities roll out policies to boost consumer confidence and support purchases, that will further juice sales.

With that in mind, Bitauto might have pushed for a sweeter deal out of Tencent, whose WeChat messaging app and payments business could facilitate a significant boost in traffic. The current deal values it at roughly four times forward-looking sales, according to Refinitiv data. New York-listed rival Autohome trades at over seven times. A group of shareholders including Tencent, JD.com and Bitauto Chairman William Bin Li have agreed to vote in favour, and they collectively control 55.3% of the voting rights. That’s only a short way off the two-thirds needed to seal the deal. Tencent may not have gotten a Covid-19 discount, but it may drive off with a bargain all the same.

Breakingviews

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