Baidu Is Selling Takeout Delivery Business to Alibaba-Backed Ele.me -- 2nd Update

Baidu Inc. is selling its takeout delivery business to Ele.me, a rival backed by Alibaba Group Holding Ltd., according to people familiar with the situation.

The cash-and-stock deal, which is expected to be announced later this week, will help the Chinese search-engine giant stop sinking money into a costly business that hasn't paid off, according to people familiar with the sale.

Ele.me is valued at $5.5 billion to $6 billion after its latest investment round led by Alibaba and its financial affiliate, Ant Financial. As of last year, Baidu's takeout business, called Waimai, was valued at $2.5 billion. The people didn't provide details on a purchase amount. Alibaba and Ant are helping fund the acquisition, one of the people said.

Waimai shareholders will hold a minority stake in the combined entity as a result of the deal, one of the people said.

The sale is part of a larger refocus for Baidu, which is prioritizing artificial intelligence as its growth driver. In recent months, the search firm has consolidated business units and focused on two AI products, a voice-interaction system called DuerOS and an autonomous-driving open source platform called Apollo.

It also signals a defeat in Baidu's attempt to compete in China's fierce online-to-offline, or O2O, market. In 2015, the company announced it would spend $3.2 billion over the next three years on on-demand services such as takeout delivery and group buying. At the time, Chief Executive Robin Li said the company thought, "in the age of mobile, search can function as a tool for connecting people with services."

But such services proved to be much more competitive and expensive than Baidu initially had expected, as Alibaba and Tencent Holdings Ltd. also jockeyed for positions as market leaders in O2O services. To drum up market share, Baidu and its food-delivery competitors have paid subsidies and offered many promotions, which has caused them to burn through cash.

Food delivery is one of the biggest battlegrounds between Alibaba and Tencent, which has backed Meituan-Dianping, an on-demand delivery site. The tech giants are relying on the online-to-offline service to help them gain new users of their lucrative online payment systems.

Last week, Tencent President Martin Lau said on a conference call with analysts that Meituan-Dianping helps Tencent generate a multitude of transactions. "We are able to have direct coverage ... of most of the restaurants in China," Mr. Lau said of the partnership.

Baidu was still touting its delivery business this spring, saying it was improving its operational efficiency and on a "visible path to sustainability and profitability," according to Chief Financial Officer Jennifer Li. More recently, though, Mr. Li and others have wanted to play down Baidu's O2O services, and there was no discussion of the business during the company's latest earnings call last month.

Write to Alyssa Abkowitz at alyssa.abkowitz@wsj.com and Julie Steinberg at julie.steinberg@wsj.com

(END) Dow Jones Newswires

August 21, 2017 11:56 ET (15:56 GMT)