Tuesday, 25 June 2019

Talk of the town

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Ahead of the group’s hotly anticipated listing, Alibaba is already stirring debate across the capital markets.

Employees hold a meeting inside the headquarters of Alibaba (China) Technology on the outskirts of Hangzhou.

Source: REUTERS/Steven Shi

Employees hold a meeting inside the headquarters of Alibaba (China) Technology on the outskirts of Hangzhou.

Alibaba Group has yet to file any listing applications to any stock exchange, but the Chinese e-commerce giant’s IPO is already the most anticipated since that of Facebook.

It is no exaggeration to say that the proposed float of Alibaba is the single hottest mandate for any stock exchange around the world. The IPO, however, has sparked a fevered debate in Hong Kong and looks most likely to end up in the US.

Bankers estimate an Alibaba IPO could total at least US$15bn, based on a group valuation of US$80bn–$100bn. However, going on a recent financial statement from one of its major shareholders, the fundraising size could even be bigger.

US Internet firm Yahoo, which holds a 24% stake in Alibaba, said in its latest earnings report that, in the second quarter through June, Alibaba’s net profit more than doubled to US$707m from US$273m a year earlier.

PrivCo, a provider of private company financial data and independent research, said the latest numbers valued Alibaba at US$110bn and implied an IPO size of US$18bn–$25bn.

Still, these numbers have not moved Hong Kong Exchanges and Clearing, the operator of the Stock Exchange of Hong Kong. After months of preliminary discussions, Alibaba’s talks with HKEx broke down in late September after the company failed to win approval for a boardroom structure that allows management to maintain close control of the firm after it goes public.

The partnership structure that Alibaba had proposed would allow the company’s key managers to nominate a majority of board members. Shareholders would then have to approve the nominees. If rejected, the management could nominate other candidates.

“Hong Kong’s listing rules are clear and, if there is a need to change them, we should do it via due process. If we chop and change our regulations to fit whoever comes along, we will lose all credibility.”

Such a structure would allow Alibaba founder Jack Ma to retain tight control of the company after it went public, even though he and his top executives own only about 10% of the firm. Besides Yahoo’s 24%, Japan’s SoftBank owns 37% of Alibaba. There are currently 28 partners in the company.

The proposal, however, aroused hot debate in Hong Kong. Many said the proposed structure was unfair and would hurt the interests of minority shareholders. In response, HKEx CEO Charles Li, in a rare move, recounted an imaginary debate about listing standards in the city on his blog.

“Hong Kong’s listing rules are clear and, if there is a need to change them, we should do it via due process,” he wrote, on the same day as reports that Alibaba was likely move its IPO to the US.

“If we chop and change our regulations to fit whoever comes along, we will lose all credibility.”

Door closing

While the HKEx has closed its doors to the Alibaba listing, US stock exchanges have welcomed the mammoth transaction with open arms.

The US market has no precedent for the exact boardroom structure Alibaba has proposed, although it allows dual-class shares that give some investors preferential voting rights.

According to Alibaba, the New York Stock Exchange and the Nasdaq have confirmed in letters that the company’s partnership structure, including its nomination to the board, is fully compliant with the listing rules.

Although the US regulators have given the management setup the green light, Alibaba has yet to file a listing application to any stock exchange. A US listing appears to be the favourite option, but an IPO is now unlikely to materialise until early next year.

Business as usual

The delay to Alibaba’s listing plan, however, does not appear to be putting substantial financial pressure on the company’s operations. It even made a few acquisitions recently.

For instance, the online payment affiliate of Alibaba is to acquire a 51% stake in Tianhong Asset Management for Rmb1.18bn (US$193m) in a bid to accelerate its push into online financial services.

Alibaba is also reported to be leading an investment round of about US$200m in fledgling US retail website ShopRunner, which offers brands from Calvin Klein to GNC free two-day shipping of goods.

Also, if Alibaba really needs some big money for acquisitions, it can always take loans. The response to the company’s US$8bn loan in July showed that banks were more than happy to lend to the internet giant.

The loan drew participation from 22 banks. As mandated lead arrangers, underwriters and bookrunners, eight lenders, namely Citigroup, Credit Suisse, DBS, Deutsche Bank, HSBC, JP Morgan,

Mizuho Bank and Morgan Stanley, took the largest pieces at US$550m each. ANZ, meanwhile, took US$500m.

Goldman Sachs took US$300m as one of the MLABs, while BNP Paribas signed up for US$250m as one of the MLAs.

Proceeds of the three-tranche facility will be used to refinance US$4bn of loans put in place last year, with the rest going to meet general corporate purposes.

The banks had been eager to join the loan, betting that it would boost their chances of winning a role on Alibaba’s enormous float and on future mandates. Alibaba’s decision to go public in the US, however, could mean banks without strong franchises there would lose out.

Credit Suisse and Morgan Stanley are hotly tipped to lead Alibaba’s listing, as the two have worked on the deal for quite some time.

Ma, a former English teacher, founded Alibaba in 1999. According to data from Euromonitor International, Alibaba dominated the Chinese Internet retailing market with a 51% market share in 2012.

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