Alibaba payments cleanup makes for neater IPO
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Alibaba just can’t stop tinkering with its corporate structure. Weeks before the Chinese e-commerce juggernaut is due to start a roadshow for an initial public offering, it has tidied up relations with its payments affiliate. Though the new arrangement is still messier than shareholders might want, it should make for a neater IPO.
Alibaba’s relationship with Alipay is complex and sensitive. The unit processes more than three-quarters of the transactions on the Chinese group’s websites, but has been owned by a private vehicle controlled by founder Jack Ma since 2011. That business, known as Small and Micro Financial Services Company (SMFSC), is also home to other ventures like its fast-growing money market funds. For customers, the units connect seamlessly. The corporate links are more complicated.
The latest reshuffle aims to draw a clearer line between the two entities. Alibaba will focus on e-commerce, while SMFSC will stick to finance. As part the deal, Alibaba is handing its affiliate a portfolio of loans to small- and medium-sized enterprises. The transfer helps to reduce the risk of meddling by Chinese financial regulators.
Under the old arrangement, Alibaba received 49.9 percent of Alipay’s pre-tax profit. The new deal entitles it to 37.5 percent of everything SMFSC brings in before tax. Alibaba thinks the claim on the earnings of a bigger business more than compensates for its reduced share. Its accountants calculate that the restructuring has boosted the company’s value by roughly 1.3 billion yuan ($211 million). However, it’s hard for outsiders to be sure because Alibaba does not tell them anything about SMFSC’s finances. Besides, Alibaba admits that if the new arrangement had been in place for the last fiscal year, its net income would have been slightly lower.
In the absence of more information, prospective Alibaba shareholders probably won’t attach much value to the relationship with SMFSC. However, the restructuring does provide them with some insurance against future embarrassment. If SMFSC turns out to be a financial behemoth and goes public, Alibaba will be entitled to 37.5 percent of the value of its equity – with no upper limit – or a 33 percent shareholding, regulators permitting. That knowledge should allow investors to spend less time worrying about Alibaba’s financial affiliate, and concentrate on its prospects in e-commerce.