FINANCE: Ant Financial Crawls Back Into Bed with Alibaba

Bottom line: Alibaba’s purchase of 33 percent of Ant Financial looks like a shrewd move for both firms, making Ant more attractive in the run-up to an IPO likely to be one of the world’s biggest this year.

In what looks like a homecoming of sorts, e-commerce giant Alibaba (NYSE: BABA) has just announced it is taking back a major stake in its Ant Financial affiliate. Followers of this pair will know they have quite a long and complex relationship, and were actually once part of the same company. But they were split apart around a decade ago for political reasons, which apparently aren’t an issue anymore.

The other major plank to this story is Ant’s own story, including the unusual way in which this deal was structured. The company, whose core asset is the popular Alipay electronic payments service, is gearing up for what could be one of the biggest fintech IPOs of this year, likely to raise several billion dollars in Hong Kong. Thus this particular move could be designed to draw more attention to this lesser-known Alibaba offspring, and also to relieve it of some of its financial burden in the run-up to that offering.

All that said, let’s begin with a quick recount of the history between this pair, followed by the latest headlines and finally a look at the implications. As I’ve said above, Ant began life more than a decade ago as the Alipay financial payments service, which was designed to make it easier for people to pay for goods on Alibaba’s e-commerce platforms.

Alipay was spun off around 2011 because of China’s rules forbidding foreign ownership of financial services providers. Many may remember that Alibaba was majority-owned by foreign entities at that time, since Yahoo had purchased 40 percent of the company a few years earlier and Japan’s Softbank was also a major stakeholder. Alibaba owner Jack Ma remained a major stakeholder in both companies after the spin-off.

Since then, Alipay has been folded into a larger holding company, Ant Financial, which has also expanded into a number of other services. Those include its Sesame Credit, which offers consumer credit rating services, and Yu’ebao, the popular money-market savings plan where Alipay users can park spare money in their accounts for higher returns. Ant has taken on quite a few major new investors since then, mostly major domestic entities.

Now the latest reports say Alibaba will take 33 percent of Ant Financial’s shares in exchange for non-cash terms. (English article) The biggest of those will see Alibaba end a current agreement that sees it get royalty and tech services fees from Ant, which accounted for about $300 million, or about 37.5 percent of Alibaba’s profits last year. That should provide a nice lift to Ant’s bottom line, which brings us to the next part of the equation, namely Ant’s upcoming IPO.

Dolling Up for IPO

Media have been reporting for a while now that Ant will make an IPO soon, possibly this year, most likely in Hong Kong. Thus this move seems to show that Ant is trying to pretty up its financials in the run-up to that move, which will relieve it of a huge annual cost. At the company’s last fund-raising in 2016, Ant was reportedly valued at around $60 billion. That means that perhaps it’s up to $70-$80 billion by now, meaning Alibaba’s stake is worth about $25 billion.

As to the IPO itself, based on a 20 percent float of the company, the fund-raising target could be about $15 billion, which would almost certainly qualify as the top fintech offering for this year. I’ve also heard that another big China fintech, peer-to-peer lender Lufax, has dusted off its IPO plan that was originally set for last year but got delayed for reasons that were never explained. But that one should be several billion dollars at most.

At the end of the day, this resumption of a direct equity relationship between Alibaba and Ant looks like a shrewd move for the latter, as it removes a big financial burden for Ant and also pulls it more tightly into Alibaba’s orbit. Alibaba benefits a little less since its bottom line will take a hit. But over the longer term this really does look like a positive step for both companies and their investors.