Alibaba revises Alipay pact before US IPO

E-commerce giant avoids loan risks and rules by reworking deal with payments affiliate

PUBLISHED : Wednesday, 13 August, 2014, 11:54am
UPDATED : Thursday, 14 August, 2014, 5:10am

Alibaba has revised an agreement with the parent of online payments affiliate Alipay, greatly reducing the e-commerce giant's exposure to loan risks and financial services regulations before its initial public offering in the United States.

In a regulatory filing in the US on Tuesday, Alibaba also said it had agreed to sell its highly successful small-enterprise loan operations to Alipay parent Small and Micro Financial Services for 3.22 billion yuan (HK$4.05 billion) in cash.

The Alipay parent, in exchange, will pay Alibaba annual fees from 2015-2017 equal to 2.5 per cent on the average daily balance of the small-business loan portfolio, while fees from 2018-2021 will be based on the amount paid in 2017.

"Bundling the sale of the small and medium-sized enterprise loan business with the amended agreement makes sense, because that lending set-up is widely recognised as a part of Alipay's overall operations on the mainland," said Ricky Lai, a research analyst at Guotai Junan International.

Alibaba, based in Hangzhou, Zhejiang province, said the reworked commercial agreement and divestment will provide the firm with a wider claim on pre-tax income from the Alipay parent's existing and future businesses.

The share of consolidated pre-tax income paid to Alibaba has been amended to 37.5 per cent, compared with 49.9 per cent under the 2011 agreement.

For regulatory reasons, Alibaba will retain about 3.244 billion yuan of the existing small-enterprise loan portfolio, which will be wound down over time as such loans are repaid.

The restructured deal will also entitle Alibaba to a one-time payment equal to 37.5 per cent of the equity value of Small and Micro Financial Services or Alipay in case either entity pursues an IPO. There is no cap on that so-called "liquidity event payment", unlike the ceiling of US$6 billion in the 2011 version of the agreement.

According to the filing, Alibaba would be entitled to as much as US$9.38 billion upon the listing of Alipay or its parent. That amount is based on the US$25 billion equity value required to qualify for an IPO.

"The possibility of Alipay or its parent firm conducting an IPO in Hong Kong in the near future makes Alibaba's restructuring of the 2011 agreement all the more attractive to investors," Lai said.

Alipay provides payment processing and escrow services to Alibaba's various business-to-business, consumer-to-consumer and business-to-consumer e-commerce operations.

Fees paid by Alibaba to Alipay totalled 2.35 billion yuan in its fiscal year to March 31, up from 1.65 billion yuan in the previous fiscal year.

Alibaba, in which Yahoo and Japan's SoftBank are major investors, established Alipay in 2004 to run its payment services. Strict new banking regulations issued in 2010, however, prompted Alibaba to divest control of Alipay. That enabled Alipay to obtain a payments licence in 2011.

Accompanying that divestment was a change in the ownership of Small and Micro Financial Services, formerly known as Zhejiang Alibaba E-Commerce, in which Alibaba founder Jack Ma Yun became the majority equity owner of the Alipay parent.

The Alipay parent is now 58 per cent controlled by Hangzhou Junhan Equity Investment Partnership and 42 per cent by Hangzhou Junao Equity Investment Partnership. The general partner of both partnerships is a corporate entity wholly owned by Ma.

Yahoo, SoftBank, Alipay, Small and Micro Financial Services, certain other affiliates, Ma and Joseph Tsai, Alibaba's then chief financial officer, entered into the original 2011 agreement.