19 November 2018

CITIC 21CN deal could be Alibaba’s fund-raising Plan B

Everyone knows that Alibaba Group Holding Ltd., China’s biggest e-commerce company, has been eyeing an initial public offering in Hong Kong to raise funds, and also its plans to buy back some stake held by Yahoo Inc. in the mainland firm. Now, an unexpected move to take control of a Hong Kong-listed firm, CITIC 21CN Co. Ltd. (00241.HK), suggests that the group is working on a Plan-B for the fund-raising project.

The deal was revealed in a stock-exchange filing by CITIC 21CN, a company controlled by China’s state-owned CITIC Group. Alibaba Group will pay HK$1.3 billion for approximately 54.33 percent stake in CITIC 21CN. The deal is subject to approval of CITIC 21CN shareholders as well as regulators. After the transaction, Alibaba Group will appoint five members to CITIC 21CN board of directors.

Control of a listing vehicle in Hong Kong will give Alibaba Group another way to raise funds for business expansion, as well as to buy back stake owned by Yahoo, its second largest shareholder with 24 percent stake in the Chinese firm.

In October last year, Yahoo said it will sell up to 208 million of the 523.6 million shares it owns in Alibaba, either directly back to Alibaba or through the IPO.

If Alibaba Group is valued at US$100 billion, a figure widely projected by investment banks last year, the Yahoo stake sale could be worth US$9.6 billion.

Market watchers believe Alibaba Group could be under pressure to meet the deadline for the repurchase of the stake from Yahoo. In addition, the company could also be under some kind of invisible pressure from authorities as the government is stepping up control over the internet sector, raising the possibility that Alibaba Group may need to reduce its foreign shareholders’ ownership to prevent any non-business interference.

It is still unclear whether Alibaba could launch a so-called back-door listing for the whole business via CITIC 21CN vehicle, as it could face regulatory challenges. That may force Alibaba to file for a new listing application. But the group has the intention to inject “certain complementary businesses” into CITIC 21CN, which offers a chance for Alibaba to cash out some of its investments. That could also pave the way for Alibaba to inject assets on a step-by-step process, or acquire more listed companies for similar purpose, given that Alibaba’s nine core businesses can each be treated as a single entity.

Meanwhile, the transaction also demonstrates Alibaba Group’s double standard towards the city’s regulatory regime.

While the group is set to take over a listing company after it holds majority shares, there is no reason for Alibaba to seek for a special arrangement for its unique partnership structure — involving 28 partners, mainly founders and senior executives — in order to keep control over a majority of the board, even though the partners together own only about 10 percent of the company.

Through this transaction, they are taking control of a listed firm on a simple majority basis. Then, why not apply the same principle to the case of Alibaba Group listing?

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EJ Insight writer

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