Alibaba Consolidates Online Local Services Units

* Alibaba said Ele.me will be merged with Koubei under a new holding company

* The new unit has secured a $3 billion investment from Alibaba and Japanese conglomerate SoftBank

Alibaba Group Holding Ltd. is merging its local services unit Koubei with its online food delivery platform Ele.me, the Chinese e-commerce giant said Thursday. The new “flagship local services vehicle” has secured $3 billion in new funding, Alibaba said.

Alibaba disclosed the plan while reporting stronger-than-expected revenue growth of 61% for the fiscal first quarter ended June 30. Net income declined 41% reflecting a one-time compensation expense, the company said. Alibaba’s Nasdaq-listed shares were up more than 3% in pre-market trading following the report.

China’s on-demand local service market is becoming a new battlefield for internet giants seeking to connect more online users with offline merchants by offering takeout, grocery delivery and reservation services. Last month, Ele.me said it would spend 3 billion yuan ($438 million) in coming months to expand its market share, igniting a turf war with market leader Meituan-Dianping, backed by internet giant Tencent Holdings.

“Our plan is to aggressively invest in these businesses to gain market share and execute deep integration into the ecosystem of Alibaba service offerings,” Alibaba said in the quarterly report.

The new unit has secured a $3 billion investment from Alibaba and Japanese conglomerate SoftBank. More investors are expected to be added, according to Alibaba.

Alibaba founded Koubei more than a decade ago as a restaurant rating and local services search site. But the company was not in full operation until June 2015, when Alibaba and Ant Financial, the operator of Alipay, jointly injected 6 billion yuan to revive the brand.

In January 2017, Koubei received $1.1 billion in funding from a group of investors including the U.S. private equity firm Silver Lake Partners; Alibaba Chairman Jack Ma backed Yunfeng Capital; CDH Investment; and Primavera Capital Group. The company currently focuses on enabling local businesses by providing payment and other technology services.

Alibaba took control of Ele.me in May in a deal that valued the nine-year-old startup at $9.5 billion as the e-commerce giant pushed into the hotly contested multibillion-dollar online food delivery sector. The buyout is an important part of Alibaba’s “New Retail” strategy to connect online and offline retail spaces.

Earlier this month, Ele.me announced a partnership with Starbucks Corp. to add the coffee shop into its delivery menu in 30 Chinese cities.

“As a result of this reorganization, subject to closing conditions, we will consolidate Koubei, which would result in a material one-off revaluation gain when the transaction closes,” Alibaba said.

Archrival Meituan-Dianping is preparing for an initial public offering, one of the most anticipated tech blockbuster listings in Hong Kong this year. Caixin learned that Meituan-Dianping is scheduled to debut Sept. 20. The IPO will raise as much as $4 billion and value the company at more than $50 billion.

Alibaba’s revenue for the fiscal first quarter rose to 80.9 billion yuan. Net income declined to 8.69 billion yuan, reflecting a one-time increase in share-based compensation expense relating to Ant Financial, Alibaba said.

“Alibaba’s three-pronged consumer offering in retail, entertainment and local services will be the long-term drivers and value creators as the Chinese middle class expands and more of these consumers demand a higher-quality lifestyle,” said Joseph Tsai, the executive vice-chairman at Alibaba, on a conference call Thursday.

“We will continue to invest in strategic business opportunities and innovation to sustain our competitive advantage and for long-term growth,” Daniel Zhang, chief executive officer of Alibaba Group, said in the earnings statement.

Contact reporter Han Wei (weihan@caixin.com)