Vipshop Joins M&A Club, New Fund-Raising Coming?
The group of big Chinese web firms driving a recent wave of M&A has a new member, with word that fast-rising e-commerce site Vipshop (NYSE: VIPS) has made its first major acquisition. The move marks the latest step in consolidation in China’s overheated e-commerce sector, which is crowded with around a half dozen major players and many smaller ones that are mostly losing money. Vipshop is one of the few players that is quite profitable, even though it doesn’t have a huge cash pile as it spends heavily to quickly build up its business. That leads to my next prediction that we could see the company raise some money soon through a share or bond sale, as it seeks to build up a war chest to help fund future acquisitions.
Vipshop’s first major acquisition looks significant, though also relatively modest compared with some of the other blockbuster deals we’ve seen in the recent buying frenzy led by Internet leaders Alibaba, Baidu (Nasdaq: BIDU) and Tencent (HKEx: 700). The deal will see Vipshop acquire 75 percent of Lefeng.com, an online seller of cosmetics and fashion products, for $132.5 million. (company announcement) The deal is part of Vipshop’s broader diversification drive, and complements its own existing core product line focused on apparel.
From a strategic point of view, the deal looks like a good first major acquisition for a fast-growing company like Vipshop, as it involves a target company that can complement its existing business and should be relatively easy to digest. That contrasts sharply with many of the other major acquisitions from the recent M&A boom, which have seen Alibaba and Baidu often stray well outside their core areas into less familiar territories with purchases priced in the hundreds of millions of dollars or even more than $1 billion.
Vipshop stumbled out of the gate when its shares started trading following their 2012 IPO at the height of a 2-year chill for China Internet stocks. But investors began to discover the company later that year, sparking a remarkable rally that has seen Vipshop shares more than quadruple over the last 52 weeks. That rise has lifted the company’s market value to $6.4 billion, making it the most valuable of China’s publicly listed pure e-commerce firms. That’s far bigger than its next biggest rival, the much older Dangdang (NYSE: DANG), whose market value now stands at just $850 million after reporting several years of losses.
Vipshop has been growing at a breakneck pace, with revenue more than doubling to $381 million in its latest reporting quarter as it swung to a profit. But the company has a relatively small cash pile, totaling just $280 million in its last earnings report. By comparison, Baidu, Tencent and other category leaders like Ctrip (Nasdaq: CTRP) and Soufun (NYSE: SFUN) have collectively raised several billion dollars over the last 18 months through a series of major convertible bond offers to take advantage of a returning positive sentiment towards China Internet stocks.
All that leads back to my original point that Vipshop could well be considering its own cash-raising exercise to fund the lefeng.com and other purchases in the next year or two. That could come in the form of a share sale, or through a convertible bond. If I were advising the company, I would tell it to take the latter option to take advantage of bullish sentiment towards its shares. I would also advise it to stick to its strategy of buying complementary companies at similar price levels, which could include names like the struggling Vancl. If it plays its cards right, Vipshop’s remarkable climb could even accelerate with a few smart new purchases, vaulting it into the big leagues with e-commerce leaders like Alibaba, JD.com and Tencent.
Bottom line: Vipshop’s first major acquisition looks like a good strategic fit, and could be followed by more similar purchases and a mid-sized fund-raising exercise.
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