Baidu Is Said to Discuss Selling Waimai Food Unit at a Discount

(Bloomberg) -- Baidu Inc. is planning to sell its money-losing food delivery unit at a discounted price to a competitor backed by Alibaba Group Holding Ltd., a person familiar with the matter said.

The business could be sold to Ele.me at a valuation that's less than half the $2.5 billion it fetched during its last round of fundraising, the person said, asking to not be identified discussing a private matter. Selling Waimai would put an end to heavy cash losses for Baidu, China's biggest search engine, as it struggles in China's competitive on-demand services market and shifts its bets to artificial intelligence, the person said.

A deal would shore up Ele.me's lead in a fiercely competitive industry that depends on scale, while bringing millions of users onto Alibaba's e-commerce and payments network. Ele.me and Baidu declined to comment on queries about a potential sale, which Caijing reported earlier.

Once a key component of Baidu's so-called “online-to-offline” strategy, Waimai ran up against foes backed by Alibaba and Tencent Holdings Ltd. The deep-pocketed internet giants, who both have market values of at least $370 billion, splurged billions on the sector to boost their own popular payments platforms, even as more people turn to smartphones to order takeout and hire cleaners.

“Its strategy in online-to-offline business has been less aggressive than before and its current key focus is in the AI-related business,” said Marie Sun, a Shenzhen-based analyst at Morningstar Investment Service. “In the coming times, I don't think Baidu will have aggressive spending in this dying business.”

Baidu has more than one O2O operation. Waimai focuses on food delivery but the search company also runs Nuomi, which handles services including movie ticketing and Groupon-like bargains. Sales in the on-demand services sector are expected to reach $230 billion in 2018, according to internet consultant IResearch.

But Waimai is severely outgunned, according to data compiled by Bloomberg. Ele.me, which is 23 percent-owned by Alibaba, had 28 million monthly active users as of May and complements the e-commerce operator's own on-demand services affiliate Koubei. Together they are vying for supremacy with Tencent-backed startup Meituan Dianping.

Read more: Baidu's Profit Surges After Curbing Spending to Prep for AI

Asked by analysts about the future of Baidu's online-to-offline units in an October earnings call, Baidu Chief Executive Officer Robin Li said the search giant didn't have to own those businesses to get value and could instead rely on a third party.

Heavy investment in the online-to-offline market has already claimed victims, with Berlin-based Delivery Hero abandoning the Chinese market last year. But Tencent President Martin Lau said in May the company is “putting up quite a big initiative around the restaurant vertical” to propel its WeChat payments platform. After losing market share, the company is investing in the sector to be more competitive, he said.

To contact Bloomberg News staff for this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net, David Ramli in Beijing at dramli1@bloomberg.net.

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan

With assistance from Lulu Yilun Chen, David Ramli