Alibaba restructures business to gain more windfall from pending IPO

Jose Castro – Fourth Estate Cooperative Contributor

NY, NY, United States (4E) – In compliance with its US regulatory requirements, Chinese internet retail giant Alibaba filed with the authorities an amendment to its earlier documentation. In this new filing, Alibaba is declaring the sale of its small and medium enterprise loan business to its competitor, Small and Micro Financial Services Company worth about US$518 million.

While the deal has been consummated, this though is still subject to government regulatory review and approvals. The other business interests of Small and Micro include small business loans, consumer finance, insurance, financial products marketing and distribution as well as asset management.

Initially, AliPay was part of the overall Alibaba corporate structure. Its (AliPay) parent company now becomes Small and Micro Financial Services through the establishment of a separate ownership back in 2011. This move is seen to comply with the recently issued regulations regarding the licensing of payment business operators.

Under the terms of the agreement, Aibaba and Small and Micro Financial Services Co. agreed to remove a US$6 billion cap on Alibaba’s share of the proceeds if ever Small and Micro undertakes an IPO or is sold to another firm. This cap represents 37.5% of the pre tax income value of the payment company. This was a decrease from the original 49.9% of pre tax income from AliPay, which is a subsidiary of Small and Micro.

In a statement, Alibaba said, “While the profit-sharing percentage is lower, the profit pool that we are entitled to share will come from all of the current and future businesses.” Another provision includes if Small and Micro is sold or goes public, Alibaba has the option to receive the percentage amount or take a one third equity stake in the new company.

The filing added, “The potential for long term economic participation can come in the form of either a perpetual 37.5% profit share stream or a possible future direct equity interest. We believe this restructuring will strengthen and benefit our company as well as better position us for future growth.”

Aside from Alibaba, other investors are set to receive benefits under the deal. These include Yahoo!, which owns one fifth of Alibaba. In a statement, Yahoo said, “We support this restructuring and believe it is beneficial to Alibaba and, consequently, its shareholders.”

Despite the reportorial requirement, the said deal is subject to many risks. One of them is the issue of conflict of interest, as Jack Ma owns 46% of Alibaba, thus with controlling voting power and interest. AliPay is also within his control and as such the conflict may, according to an Alibaba statement, ‘threaten our ability to continue to receive payment services on preferential terms or conflicts relating to commercial opportunities.’

Alibaba is in the midst of its own IPO launch scheduled to be done in late 2014. The said IPO would be listed on the New York Stock Exchange. The IPO is projected to earn at least US$20 billion for the company owned by Jack Ma. Should this IPO be completed, Alibaba would become the largest Chinese company to be listed in the US stock market.

Article © AHN – All Rights Reserved
About the Author

Leave a Reply