Alibaba triangular dealmaking adds to IPO quirks

April 9, 2014

By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Powerful insiders are the norm in internet companies. Alibaba’s tie-up with a digital TV company adds an extra twist. The Chinese e-commerce group, which is planning a U.S. listing, has signed a three-step deal with China’s Wasu Media that looks a little too clever for comfort.

The agreement to make and distribute content, announced on April 9, has logic. The two companies, both based in the city of Hangzhou, already make television set-top boxes together. Jack Ma, Alibaba’s colourful founder and chairman, has long talked of creating culture for China’s masses.

The financing of the deal is less logical. Alibaba will lend 6.5 billion yuan ($1.05 billion) to its co-founder Simon Xie at an 8 percent interest rate. He is investing the cash in a new vehicle, co-owned by Ma and another internet mogul, Shi Yuzhu. That vehicle in turn is investing in Wasu, in return for a 20 percent stake.

Alibaba hasn’t commented on the financial aspects of the deal. Nevertheless, there are two problems. First, it seems unnecessarily complex. If Wasu is a worthy partner, why doesn’t Alibaba invest directly? Twitchy Chinese regulators who closely monitor ownership of media companies may explain the need for such manoeuvres. But circumventing the spirit of the rules would hardly be encouraging.

Second, the spoils don’t appear to be evenly divided. If Wasu’s shares sink, Alibaba’s loan may be at risk, depending on the value of the collateral that Xie has pledged. If the shares rise, Ma, Xie and Shi apparently pocket the gains. They are already $245 million better off after Wasu shares rose 10 percent on April 9.

Privately held Alibaba doesn’t have to answer to public markets. And the transaction may include other terms which somehow share the trio’s gains with the rest of the company.

But the triangular deal shows how hard valuing Alibaba will be. One of the biggest questions for future investors is what happens if insiders’ interests differ from their own. Ma and his cohort have already proposed that key individuals retain the right to nominate board directors, a requirement that scuppered Alibaba’s chances of a Hong Kong listing. The Wasu deal demonstrates how blurred the line between public and private can become.

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