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Thursday, 02 October 2014

In search of the Alibaba effect

EQUITIES: Bankers in Hong Kong and New York mull impact of a potential IPO

Alibaba Group’s acquisition last week of a US$586m minority stake in Sina Weibo, the popular Chinese micro-blogging service, has taken anticipation surrounding the e-commerce giant’s potential IPO to a new level.

While the acquisition shows Alibaba’s ambitions extend far beyond any eventual listing, it also hints at what’s at stake as bankers around the globe vie for a role in that mandate.

Intense competition among investment bankers is nothing new, but Alibaba’s sheer scale means its choice of listing destination has the potential to transform the fortunes of the bankers – and exchanges – that play a role in the floatation.

Bankers say that a company of Alibaba’s size and reputation can list wherever it wants, with little difference in valuation between a Hong Kong or US listing. No decision on timing or venue has been taken, and Alibaba has chosen to stay silent over its IPO plans.

“They can be a success in the US or Hong Kong,” said a Hong Kong-based banker. “The biggest difference between the two markets is liquidity.”

A New York IPO for Alibaba – whether on the NYSE or Nasdaq – would reinforce the US market’s dominance of the technology sector and could restore confidence in the listing process in the wake of last year’s Facebook fiasco.

It would also test US investors’ confidence in Chinese companies following a series of accounting scandals.

Dealmakers in the US have lately faced hurdles selling once-favoured Chinese equity to investors, as the slowing PRC economy, and the accounting concerns, have made portfolio managers decrease their allocations to China – if not Asia.

For Alibaba’s banks, an IPO outside Asia would test what they often market as their “global connectivity”, the ability of bankers that are physically closer Hangzhou, China-based Alibaba to communicate with colleagues that are closer to investors and the exchange in, for example, New York.

While many big Chinese companies have successfully listed in the US, Alibaba would be by far the biggest to do so since the 2008 financial crisis, testing the capacity of newly streamlined equities divisions.

Local experience

Similarly, a listing closer to home – in Hong Kong, specifically – would underline the growing importance of Asian investors in the global capital markets. It could also reinvigorate a Hong Kong market that is still recovering from a dismal 2012.

Banks in Hong Kong are hopeful that a deal would offer some welcome respite from the long list of Chinese companies that are squeezing fees, inflating bank groups and pushing for incongruous valuations on their overseas fundraisings. Alibaba has paid its banks well in the past, and has rewarded investors for sticking with it. By contrast, the planned US$1.0bn–$1.5bn IPO for state-owned China Galaxy Securities has 16 banks on it and valuations offered in pre-deal research are understood to be much higher than its nearest peers. 

“Alibaba is a very different dynamic to an SOE in China who has to run a beauty process and there’ll be phone calls from state councils, from here and there, to try to get one bank in one position, one in another,” said a senior Hong Kong-based banker. “On Alibaba there will be none of that. That’s exactly the way we want China to be and one day we’ll get there.”

Alibaba’s coverage bankers, based mainly in Hong Kong or the mainland, don’t want to see the IPO execution move to the US. Part of the offering fee will inevitably shift there, too.

“We can earn all the glory and money if Alibaba lists in Hong Kong. Why not?” said a Hong Kong-based banker who has been following the deal closely.

The issuer already has experience with investors in the city. In 2007, it listed wholesale portal Alibaba.com in Hong Kong, then the largest tech IPO in the city. Deutsche Bank, Goldman Sachs and Morgan Stanley led the IPO. Shares in the dot-com were delisted last year at the original IPO price – a heady premium at the time – in part to pave the way for a listing of the parent group, expected this year.

The firms that will take a lead role on an IPO may be drawn from the list of Alibaba’s lenders. On its most recent US$8bn financing, the PRC borrower has enlisted Citigroup, Credit Suisse, HSBC, JP Morgan and Morgan Stanley to assist on term-sheet discussions. In addition, it has added ANZ, DBS, Deutsche Bank and Mizuho as arrangers.

Wherever Alibaba decides to list, however, investment bankers want other potential mainland issuers to take note of how they run the process.

“Their IPO is just going to be flying off the shelf,” said the senior banker. “They’re very conservative about things like pricing and valuation. They’re not going to go crazy. They will want to leave a little money on the table because they actually want people to come back for more because they are going to be needing a lot more.”

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