(Adds IPO timing in 15th paragraph.)
Aug. 13 (Bloomberg) -- Alibaba Group Holding Ltd. will get at least $9.4 billion from the future value of its finance affiliate after striking a new deal with the payment processor.
China’s biggest e-commerce operator is entitled to the payment if Alipay or its parent company seek an initial public offering, according to a filing yesterday that scrapped a previous agreement limiting the value to $6 billion. Alibaba also gets the perpetual right to 37.5 percent of the finance arm’s pretax earnings and can buy a stake of about one-third if regulators approve.
Alibaba’s relationship with the finance business has been a point of contention since billionaire founder Jack Ma spun off Alipay into a Chinese company in 2011, citing foreign-ownership restrictions. With Alibaba headed toward what may be the largest IPO in history, the deal locks in a share of earnings from the payments unit, which has expanded into money markets and controls more than 574 billion yuan ($93 billion) of funds.
“The financial unit is adding more services and becoming bigger in scale and complete in services,” said Wang Weidong, an analyst at Shanghai-based Internet consultant firm IResearch. “After Alibaba lists, the financial arm will be a highly valuable unit, perhaps just as valuable as Alibaba.”
The new deal also will see Hangzhou-based Alibaba transfer its small-business lending arm to Zhejiang Ant Small & Micro Financial Services Group Co., the parent of Alipay, for $518 million in cash plus annual fees for seven years, it said in the U.S. regulatory filing.
The sale means the financial-services assets will be owned by Chinese nationals instead of the global investors that may buy shares in the IPO. It also takes financial and regulatory risk relating to the operations off of Alibaba’s balance sheet, while increasing the pool of profits the company can generate from them, the filing shows.
Alibaba transferred Alipay to Small & Micro Financial -- which is controlled by Ma -- amid concern that it wouldn’t be permitted to conduct business in China while it has foreign ownership, the IPO filing shows. That sale was criticized by shareholder Yahoo! Inc., which said it wasn’t informed of the sale at the time, and led to the 2011 agreement on compensation.
In June 2010, the People’s Bank of China stipulated that the scope of business for payment services provided by non- financial institutions in China, the qualifications of any foreign investor and any foreign ownership percentage would be subject to State Council approval. China has yet to implement such laws restricting foreign ownership.
In a statement, Yahoo said the terms outlined in yesterday’s filing were negotiated on a collaborative basis and that it supports the agreement.
SoftBank Corp., the Japanese wireless carrier led by Masayoshi Son that owns more than 30 percent of Alibaba, said the deal is beneficial to all parties.
“We support this restructuring,” Mariko Osada, a spokeswoman for Tokyo-based SoftBank, said by phone.
The implied equity value of a finance business IPO would be at least $25 billion, about 56 percent more than its previous valuation, according to the filing. Alipay, which is similar to Paypal, processed more than three quarters of retail transactions on Alibaba’s platform last year and had more than 800 million registered users as of July 2013.
Alibaba, which operates platforms including Tmall and Taobao Marketplace, may be worth $187 billion, according to a survey of 11 analysts by Bloomberg in July. The pending IPO is set to eclipse Facebook Inc.’s as the biggest in the technology sector.
“There’s a symbiotic relationship between Taobao, TMall and Alipay,” said Zennon Kapron, Shanghai-based director of Kapronasia, a consultancy for Asia’s financial services. “The other thing that Alipay gives Alibaba is a tremendous amount of customer information.”
Alibaba is weighing a plan to start marketing the share sale to investors on Sept. 3, with management traveling across Asia, Europe and the U.S. before an IPO in the middle of the month, people with knowledge of the matter said.
The schedule, put forth by banks managing the IPO, would have meetings begin in Hong Kong and Singapore before executives travel to London and eventually host their first U.S. event in New York on Sept. 8, the people said, asking not to be identified discussing private information. The timeline has Alibaba targeting a Sept. 16 trading debut, the people said.
Alibaba said in the latest filing that if the financial arm raised any capital, it would be from Chinese investors, suggesting an IPO in China.
“These adjustments probably come from pressure from institutional investors, who wanted to see more of that back in the deal,” said Paul Gillis, a professor of accounting at China’s Peking University. “They were concerned that too much profit might end up in Alipay and not in Alibaba.”
The two shareholders in Small & Micro Financial are Hangzhou Junhan Equity Investment Partnership and Hangzhou Junao Equity Investment Partnership, mostly owned by Alibaba employees and partners, according to the filing.
Ma, however, has the voting rights for Small & Micro Financial through his fully owned company, according to the filing.
Ma’s stake in the holding in the parent of Alipay wouldn’t be higher than his stake in Alibaba Group, which stands at 8.9 percent now, according to the filing.
Alipay said in November it would offer 60 percent stake to investors to spread equity to a broader worker base and give an incentive to employees.
--With assistance from Jonathan Browning and Zijing Wu in Hong Kong.