INTERNET: Jack Ma Eyes Alibaba Stake Draw-Down — Sort Of

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Bottom line: A plan by Alibaba’s chairman and vice chairman to borrow $2 billion using their company stock as collateral is a simple diversification move, and doesn’t represent any change in the company’s fundamentals or outlook.

Alibaba chairman, vice chairman eye $2 bln loan

Shares of e-commerce leader Alibaba (NYSE: BABA) have been buzzing these last few days since media reported that Chairman Jack Ma and one of the company’s other co-founders are preparing to diversify their company holdings that are worth billions of dollars. Neither Ma nor Vice Chairman Joe Tsai is planning an actual share sale, which would almost certainly undermine the company’s shaky stock. Instead, the pair are in talks to take out a $2 billion loan using their huge stash of Alibaba shares as collateral.

Alibaba’s shareholders didn’t seem to like the plan too much, and made their voices heard by trimming nearly 4 percent from the company’s share price after reports of the move surfaced late last week. The latest close means Alibaba stock now trades at a record low of $63.91, or about 6 percent below the $68 price for its record-breaking $25 billion IPO that will celebrate its one-year anniversary later this month.

Alibaba’s publicity machine was quick to try to downplay the news, forwarding an analyst report saying the stock was significantly undervalued with plenty of potential upside. As an independent company watcher, I do tend to agree with that view and expect that investors are getting just a bit too antsy and looking for any reason they can find to sell the stock right now.

We’ll return to the valuation question later, but first let’s review the latest headlines that cite unnamed bankers saying Ma and Tsai are in talks for a $2 billion margin loan that would be made using their stock as collateral. (English article; Chinese article) The pair may use the money to fund Blue Pool Capital, which is described as a hedge fund manager set up by Tsai a decade ago.

Credit Suisse, Goldman Sachs and Morgan Stanley are all working on the deal, which could be announced later this month after a lock-up period for Ma and Tsai ends on September 21 — the one year anniversary of Alibaba’s IPO. Both Ma and Tsai are billionaires with fortunes worth $29.4 billion and $4.3 billion, respectively. If much of their combined $33.7 billion fortunes are in Alibaba stock, the pledging of shares for this $2 billion loan would amount to a sizable but still relatively modest 6 percent of their holdings.

Implied Confirmation

An Alibaba spokesman quoted in the report said that this kind of share-based financing is common for company founders and represents “prudent financial planning”, which seems to confirm the transaction is happening. The reports point out that Tsai said both he and Ma won’t be selling their shares when their lock-up expires later this month. Thus the $2 billion margin loan represents a way for them to keep their promise while also diversifying their Alibaba holdings.

Now that we’ve gotten all the detail out of the way, let’s return once more to what all of this means for Alibaba and its stock in the months ahead. At the end of the day, this kind of loan may not represent a selling of stock. But it’s nearly identical since the banks making the loan would take the equivalent amount of shares from Ma and Tsai if they failed to replay the loan.

More generally speaking, this kind of share sale is quite common by company founders. Most of the time they are looking to diversify their holdings, even though sometimes markets interpret such moves as a lack of confidence in the company’s future prospects. In this case I really do think this move is a simple diversification play by Ma and Tsai, and that nothing major has changed about Alibaba’s fundamentals. Accordingly, I continue to believe the stock may be oversold, and we could see a rebound once China’s domestic stock markets start to settle down.

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