JD.com Pays Big Premium For Majority Control of Dada Nexus

Key Takeaways:

• JD.com will take majority control of Dada Nexus for a big premium, completing a deal the two first announced a year ago
• Deal may have been delayed by Beijing regulators, who are wary of the growing influence of China’s biggest technology companies

By Doug Young

There’s nothing like having a rich parent who doesn’t mind overpaying to indulge you.

That seems to be one of the biggest messages in the latest announcement from Dada Nexus Ltd. DADA, the local delivery arm of e-commerce giant JD.com JD 9618.HK)). More precisely, JD.com has just taken majority control of this particular offspring, cementing a deal that was first announced a year ago.

While it’s not that unusual for M&A deals to take this long to complete, this one is a bit unusual because it really only involved the sale of a very small stake. JD.com already owned 46% of Dada Nexus when the pair first announced last March that JD would pay $800 million for new Dada shares that would raise that stake to 51%.

Things apparently took longer to complete than either side anticipated, and now they’ve just announced the deal has received “all the requisite regulatory approvals” and was expected to close by the end of February. Final terms of the deal are a bit different from the original announcement, with JD ultimately paying $546 million and giving Dada some other unspecified “strategic resources” to boost its stake in the company to 52%, slightly higher than the original 51%.

To understand why we assert that JD is probably overpaying for its increased stake, we need to do a little math to show exactly what it’s getting for its money.

For starters, Dada’s share price was noticeably higher when the deal was first announced, with the stock trading at about $30. The shares now trade at less than a third of that level, closing Tuesday at $8.01. So, if we do some simple math based on the big stock drop, JD.com’s purchase price should have dropped by a similar amount from the original $800 million to about $213 million.

We can offset that a little by saying JD.com is getting an additional 1% of Dada, which is worth around $19 million based on Dada’s latest market value. That still only brings the value of the stake JD.com just acquired to about $232 million – far less than the $546 million JD.com paid.

Shareholders seemed to initially like that JD.com was paying such a big premium, with Dada Nexus stock rising 4% on the day of the announcement. But the stock went into a tailspin over the next two business days and now trades 14% below preannouncement levels, suggesting investors may not feel as certain about the benefits of this deal after all.

Many overseas-listed Chinese stocks tanked last year, with most declines starting around the middle of the year after China indicated it would take a tougher stance towards such listings. Dada Nexus’ stock held up surprisingly well despite all that, possibly because many believed it was too small to capture the attention of Beijing regulators, who were more interested in bigger names like Alibaba BABA and Meituan (3690.HK), as well as owners of cutting-edge technologies like Full Truck Alliance YMM.

But then the company’s stock went into a nosedive starting in late November, and in December fell below $16 – the price for the company’s 2020 IPO shares. All said, the stock has lost about two-thirds of its value since late November.

Growing JD ties

So, what exactly has spooked investors so much in the last two months? The answer appears to be the company’s growing reliance on JD.com, which, like China’s other internet heavyweights, has become a target of government efforts to rein in the country’s largest internet companies that Beijing believes have become too powerful.

Part of that effort has seen Beijing pressure big players like Alibaba to sell non-core assets. Against that backdrop, the JD.com stake purchase looks like a move in exactly the opposite direction, giving JD majority control of the company that effectively makes Dada a subsidiary. That may explain why the deal took so long to get regulatory approval, and also why JD.com paid such a big premium.

Dada certainly could use the cash, as its current money-burning ways have seen its cash pile dwindle by more than half to 2.93 billion yuan ($464 million) at the end of last September from 6.29 billion at the end of 2020. Thus, this generous new cash infusion from JD.com will roughly double the company’s cash reserves.

Dada’s most recent financial report for last year’s third quarter showed it lost 543 million yuan for the period, widening from a 434 million yuan loss a year earlier. The red ink is expected to continue this year and into 2022, though analysts see the losses narrowing sharply next year. Still, companies can’t afford to go on losing money indefinitely.

At the same time, Dada Nexus’ latest results also show its growing reliance on JD.com for business. The company operates intra-city delivery services through two brands, helping merchants and other businesses move goods and other items around within individual cities. One of those brands, called JDDJ, which works closely with JD.com, accounted for nearly two-thirds of its total in the latest quarter, up sharply from 45% just a year earlier.

So, it makes sense why JD.com, which also controls the more traditional JD Logistics (2618.HK) delivery service, would want to bring Dada Nexus more tightly into its embrace. But Beijing regulators might not see it that way, and investors may worry the company could have difficulty surviving on its own if JD.com is forced to spin off the unit down the road.    

Despite its big stock decline, Dada Nexus is still relatively competitive with other logistics companies in terms of valuation. It currently trades at a price-to-book (P/B) ratio of 3.1, which is roughly comparable to the 3.3 ratio for JD Logistics. ZTO Express ZTO trades at a similar P/B of 3.2, while YTO Express (6123.HK), another traditional logistics provider, trades at a much lower 1.2.

But many might feel Dada Nexus should trade at a premium compared to these bigger, more traditional logistics companies, which have much-higher costs due to their national operations that include both inter- and intra-city deliveries. That’s reflected in the bullish outlook on the company by most analysts, who believe Dada’s stock should be worth about $30 – more than four times its current level, according to the average of 12 polled by Yahoo Finance.