A quick response (QR) code is displayed on an advertisement for Ant Financial Services Group’s Alipay, an affiliate of Alibaba Group Holding Ltd., at a Takeya Co. Ueno Select shop in Tokyo. (Photographer: Shiho Fukada/Bloomberg)  

Alibaba to Buy a Third of Ant Financial, Paving Way for IPO

(Bloomberg) -- Alibaba Group Holding Ltd. will buy 33 percent of Ant Financial, helping to clear the way for an initial public offering of the Chinese payments giant.

China’s biggest e-commerce operator will acquire new shares in its finance affiliate in exchange for certain intellectual property rights, the company said Thursday. While no cash is changing hands, Ant Financial will end royalty payments to Alibaba that were worth more than $300 million last fiscal year. Alibaba also raised its annual forecast after posting third-quarter sales that topped estimates.

Alibaba hasn’t held a stake in the owner of Alipay since founder Jack Ma controversially spun out the business in 2011. Ant Financial has had a string of recent setbacks, with its U.S. expansion thwarted by the collapse of a deal for MoneyGram International Inc. while its Chinese business faces greater scrutiny from regulators and increased competition from Tencent Holdings Ltd.

“This acquisition of Ant Financial’s stake could be a preparation for its potential IPO,” said Steven Zhu, a Shanghai-based analyst with Pacific Epoch. “Alibaba was able to improve revenue growth because performance-based ads were able to generate better revenue on mobile apps and its catered user pages drove more sales.”

Alibaba said revenue in the 12 months ending March will rise 55 to 56 percent, up from a range of 49 to 53 percent previously. Ma is pushing deeper into brick and mortar retailers, including supermarkets and department stories, as the company also took control of the Cainiao logistics business.

That has come at a cost to profitability, with the operating margin shrinking to 31 percent in the quarter from 39 percent a year earlier.

Alibaba to Buy a Third of Ant Financial, Paving Way for IPO

Shares of Alibaba fell 4.4 percent, to $195.41 at 9:56 a.m. in New York.

Formally known as Zhejiang Ant Small & Micro Financial Services Group Co., Ant Financial operates Alipay as well as money market funds and credit scoring. It’s based in Hangzhou, China, the same hometown as Alibaba.

Alibaba Vice Chairman Joe Tsai said Ant is profitable in three key businesses of payments, wealth management and lending to consumers and small and medium sized businesses. No decision on an IPO venue has been made, Chief Financial Officer Maggie Wu said on a conference call.

Ant Financial paid Alibaba about 2.09 billion yuan ($332 million) in royalty and technology fees in fiscal 2017, up about 86 percent from the previous year, according to a 2017 Alibaba filing.

Once dominant in China, Alipay’s share of online payments in the country has slumped to 54 percent as of the end of September amid the rise of Tencent’s WeChat platform, according to research firm Analysys International.

Ant Financial was valued at $74.5 billion in 2016 by CLSA and the company almost doubled earnings in fiscal 2017 as it expanded its footprint in wealth management and overseas markets. Thursday’s announcement comes just a few months after China took a major step toward opening its financial system by relaxing some of the rules on foreign ownership. The deal will likely be subject to regulatory approval.

Third-quarter revenue rose 56 percent to 83.03 billion yuan ($13.2 billion), topping estimates for 79.7 billion yuan. Adjusted earnings-per-share were 10.61 yuan, surpassed projections for 10.53 yuan.

Revenue from the company’s core e-commerce business jumped 57 percent to $11.3 billion while cloud computing more than doubled to $553 million.

Alibaba to Buy a Third of Ant Financial, Paving Way for IPO

Wu said investors shouldn’t equate lower margins with lower profits, as the overall business is growing.

“We are making the pie much bigger,” she said. “60 percent of an apple compared with 40 percent of a watermelon, which one do you want?"

Credit Suisse Group AG acted as a financial adviser for the Alibaba Independent Committe in the Ant Financial transaction.

©2018 Bloomberg L.P.