Alibaba’s purchase of AutoNavi is a land grab, in two senses.
The Chinese e-commerce group has offered a premium price to buy the 72 percent of AutoNavi, a mapping company listed in the United States, it doesn’t already own, valuing the whole thing at $1.6 billion. There’s a compelling competitive reason for Alibaba to get deeper into online maps, but what’s hard to locate is the financial rationale.
One driver of the deal is keeping up with the Joneses. Baidu, China’s leading search engine and a rival of Alibaba’s, is also the country’s dominant online mapper - its map-apps account for 35 percent of total downloads, according to research by T. H. Capital. Tencent, the third member of China’s Internet oligopoly, is far behind, but its chatting app WeChat is rapidly branching into location-based services, posing a potential e-commerce threat.
Buying AutoNavi also plugs into the growing mania for O2O commerce - online-to-offline. The theory is that consumers will increasingly use smartphones to point them to nearby services and shops, or even preorder from restaurants online, all of which benefit from detailed mapping. In Alibaba’s case, there’s also an opportunity to weave in its fast-growing payment and financial service, Alipay.
What doesn’t appear on the plan is strong financial logic. It’s plausible that AutoNavi might be worth more with the backing of a cash-rich Internet giant. Competition is fierce, and AutoNavi’s revenue, which comes partly from making in-car navigation systems, is starting to decline.
But Alibaba is valuing AutoNavi at around five times forecast revenue for 2014 according to Eikon estimates - and a 39 percent premium to AutoNavi’s 10-day average trading price - for a business that analysts estimate will swing from a small operating profit to a $46 million loss this year. Expanding O2O services sounds exciting, but it’s not clear if it will translate into incremental advertising revenue.
China’s Internet continues to grow rapidly, but such concerns are remote. Alibaba is paying for AutoNavi in cash, and the additional $1.2 billion payment is small for a company that is likely to command a market capitalization of more than 100 times that if a long-awaited listing takes place in 2014. As long as grabbing market share is the priority, questions about return on investment can be easily buried.
Robyn Mak is a research assistant and John Foley is China Editor for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
