Alibaba Group Holding, China’s biggest e-commerce company, said late last night that it has completed the repurchase of half of Yahoo’s 40% stake after securing $5.9 billion of debt and equity financing from global banks and international investors. As per the agreement between the two companies, which was first announced in May, Alibaba will pay Yahoo $6.3 billion in cash and $800 million in preference shares for a total acquisition cost of $7.1 billion.
The difference between the $5.9 billion financing package and the total outlay, which also includes a one-time cash payment of $550 million related to the amendment of the existing technology and intellectual property licence agreement between the two firms, will be covered through internal cash resources.
The completion of the financing marks the end to an eventful 12 months for the Alibaba group, which was founded by Chinese internet entrepreneur Jack Ma in 1999. During this time it has also taken its business-to-business unit Alibaba.com private, welcomed a number of new investors onto its shareholder roster and raised an additional $5 billion of capital from the financial markets. But the repurchase is also the first step of what is expected to be a monetisation of Yahoo’s entire stake in the Chinese company.
Under the agreement between the two firms, Alibaba has the right to buy back half of Yahoo’s remaining stake, representing another 10% of its outstanding share capital, at the time of a potential future IPO. And if Yahoo’s stake does fall to just 10%, it is likely to then be viewed as a financial asset that will eventually be offloaded to achieve a return on the investment. Alibaba keeps saying that it has no current plan to go public, but it is widely expected that the entire group will seek a listing in the next few years.
Yahoo acquired its stake in 2005 at a cost of $1 billion and the transfer of its Yahoo China business to Alibaba. The two firms have cooperated at various levels ever since, but the relationship had become strained in the past couple of years, and the announcement of the share buyback plan in May had been preceded by lengthy negotiations of how to unwind Yahoo’s ownership. Shareholders of both companies are positive to the repurchase.
Yahoo’s share price initially gained 1% on the announcement last night and then proceeded to hover about 0.5% higher in an otherwise flat-to-negative market. The stock then had another spike at about 2.30pm US time when Yahoo came out and confirmed that it plans to return 85% of the Alibaba proceeds, net of tax and fees, to shareholders. The company had earlier said that it intended to distribute about half of the proceeds and the larger handout saw the share price jump as much as 2.9% before easing back to finish the session 1.4% higher.
Meanwhile, the financing package itself is a powerful endorsement of Alibaba’s businesses and shows the confidence that global investors and banks have in the company’s growth outlook. According to the Alibaba press release issued last night, the $5.9 billion financing package is the largest private financing for a private sector Chinese company and the largest non-LBO private financing for a technology company globally. To be able to raise that much in a period marked by a highly unstable macro-economic environment, both in Europe and China, and a generally negative sentiment towards internet stocks that has dragged down not only Facebook, but companies like Zynga, Groupon, Dangdang and Renren as well, is definitely noticeable.
“Our ability to raise financing in these difficult market conditions speaks to the strength of our business, our market leadership position and the confidence our investors and financial partners have in the future of Alibaba,” said Joe Tsai, Alibaba’s chief financial officer.
“Despite a challenging market environment, we were able to narrow people down to focus on the positive attributes of the company — its metrics and scale and its ability to convert its brand into a revenue-creating machine,” added Vik Malhotra, co-head of investment banking for Asia-Pacific at Credit Suisse, which was involved in both the equity and debt financing and acted as a financial adviser on the share repurchase as well. “The first-quarter results were also very good and on top of that, the earlier bank financing for the Alibaba.com privatisation was well oversubscribed and that gave the market a lot of confidence,” he said.
The financing
The $5.9 billion financing package comprised $2 billion of senior debt in the form of two four-year bank loans and $3.9 billion of common equity and convertible preference shares (the split between the latter two wasn’t disclosed).
Half of the debt financing was put up by eight international banks — ANZ, Barclays, Citi, Credit Suisse, DBS, Deutsche Bank, Mizuho and Morgan Stanley — while the other half was provided by China Development Bank. The terms were not disclosed, but sources said they are similar to those on the $3 billion three-year syndicated loan that Alibaba secured in June and which was used to finance the privatisation and delisting of Alibaba.com.
The common equity was sold at a price of $15.50 per share, which, according to a source, is a premium to the price that Alibaba paid for the Yahoo shares, ensuring that the transaction is immediately accretive for existing shareholders. The price puts a value of $40 billion on the company, up from $35 billion when it last sold new shares a year ago.
The investors were led by China’s main sovereign wealth fund, China Investment Corp (CIC), private equity firms Boyu Capital and Citic Capital, and CDB Capital, which is the equity investment arm of China Development Bank. They were joined by existing shareholders, including Silver Lake, DST Global and Temasek Holdings. Alibaba didn’t provide a breakdown of how much each of them invested.
The preference shares have a five-year maturity and will pay a 2% interest in the first two years and 5% in the next three years. They have a conversion price of $18.50 per share, which equals a 19% premium over the price at which the common shares were sold. The investors who bought the preference shares haven’t been named, but a source said that they comprised a decent mix of sovereign wealth funds, private equity, hedge funds and long-only accounts. Most of the demand came from Asia, followed by the US and a bit less from Europe.
The advisers supposedly approached only a small group of investors and about 70% of those meetings were converted into actual orders. In the end, about 15 or so investors participated in the preference share tranche. However, Alibaba has the option of potentially upsizing this portion of the deal within the next month or so, and sources said it may choose to do that based on the fact that it has received a number of reverse inquiries from investors who are keen to join in. This would allow the company to preserve a bit more of its cash, although Alibaba generates a lot of cash flow and it already has $3 billion of cash on hand after completing the Yahoo repurchase so it isn’t exactly in the need of funds at the moment. One source said the company will probably invite no more than two or three additional investors if it decides to upsize.
Several of Alibaba’s businesses have been growing rapidly in recent years in line with the overall growth of the e-commerce sector in China. The growth is driven by a combination of a low penetration and the fact that more people taking their buying online. The company also has a good track record in terms of generating sustainable revenues and profits. Aside from Alibaba.com, which provides online trading platforms for small businesses engaged in international and domestic trade, it also operates the Taobao Marketplace, which, according to its own account, is China’s most popular online shopping destination; Tmall.com, which is a leading online platform for merchants offering quality, brand-name goods to consumers; and several other smaller businesses.
After taking Alibaba.com private and reducing Yahoo’s stake to 23% (its holdings will increase to 23% from 20% because part of the shares that Alibaba is buying back will be cancelled), the next logical step for the company in the eyes of many observers is to list the entire group. And while the company continues to dodge that particular question, the agreement with Yahoo provides several incentives for going ahead with an IPO sooner, rather than later. These include the fact that Alibaba is obligated to pay royalties to Yahoo every year until it goes public and the fact that there is a step-up of the interest on the preference shares after two years.
The advisers
Credit Suisse was a lead M&A adviser to Alibaba for the transactions with Yahoo, while Deutsche Bank was a co-adviser. Credit Suisse and Morgan Stanley were joint placement agents for the convertible preference shares, and Credit Suisse was also the sole adviser for the equity financing. Rothschild was the adviser for the senior credit facilities.
On the legal side, Wachtell, Lipton, Rosen & Katz acted for the company in its transactions with Yahoo; Fenwick & West dealt with intellectual property matters; and Freshfields Bruckhaus Deringer was advised on the debt, convertible preferred and equity financings.
Other advisers included Sullivan & Cromwell, which represented CIC, Boyu Capital and Citic Capital in connection with the equity financing, and Citi, which acted as a financial advisor to CIC.
UBS, Allen & Company and Goldman Sachs were financial advisers to Yahoo. The US firm also enlisted Skadden, Arps, Slate, Meagher & Flom; and Weil, Gotshal & Manges as legal advisers, while the Yahoo board was advised by Munger, Tolles, & Olson.
