A Merger Arb With 30-50% Upside

I was scrolling Twitter the other night when someone mentioned Meituan (MPNGY / 3690.HK) in the context of a deal I hadn’t seen. So naturally I went and looked at the company they planned on acquiring — DingDong (DDL).

The whole company was trading under $600 million. And it had just agreed to sell its China business to Meituan for $717 million in cash.

The stock was trading at a 20% discount to the takeout price. That obviously got my attention…

If you don’t follow what’s happening in China right now, three of the biggest internet companies in the country are in an all-out war over something called “instant commerce.” Basically 30-minute delivery on everything. Groceries, meals, household items. Alibaba, JD, and Meituan are all pouring billions into it and the losses are brutal. Meituan lost roughly $2.5 billion in a single quarter partly because of this spending.

These companies are basically subsidizing deliveries to win market share.

Dingdong is a small independent player caught in the middle of all that. Over 1,000 warehouses, about $3.5 billion in revenue, profitable for seven straight quarters. A decent business on paper.

But when three companies with massive balance sheets are all willing to lose money to win your space, a standalone grocery company was never going to survive long term. The founder saw the writing on the wall. His former competitor, Missfresh, waited too long and went to zero.

So selling to Meituan at a large premium to its current market cap makes sense.

On February 5th, Dingdong signed a definitive agreement to sell its entire China business to a Meituan subsidiary for $717 million in cash. But it gets better…

Before closing, the Cayman parent entity (what we actually own as ADS holders) can pull up to $280 million in additional cash out of the subsidiary.