E-COMMERCE: All Eyes on Demand, Purpose for Alibaba Mega-Loan

Bottom line: Alibaba will come close to meeting the top end of its target of raising $3-$4 billion with a new bank loan, and chances are as much as 50-50 that it will use the funds to make bids for Groupon or the stake of itself held by Yahoo.

Alibaba turns to banks for new mega-loan

After first splashing into the headlines with rumors 2 weeks ago, e-commerce giant Alibaba (NYSE: BABA) has finally announced its latest cash-raising exercise in the form of a syndicated loan worth at least $3 billion. Following that official confirmation, all eyes will now be looking to see if Alibaba can find more demand to boost the loan amount even higher, and for any indication of what exactly it has planned for the new funds.

Let’s begin by looking at the latest reports, which have Alibaba announcing the loan in a regulatory filing. It’s somewhat noteworthy that the high-profile Alibaba hasn’t issued a formal press release about the loan, perhaps because it’s waiting to see where the final amount will top out. But perhaps Alibaba has also finally realized it’s better not to raise expectations too high with a hype-filled announcement, which can ultimately backfire if interest from smaller banks in joining the new lending syndicate is poor.

In its new filing, Alibaba simply says it has signed a deal for a 5 year, $3 billion loan with a syndicate of 8 lead banks. (English article) It said the amount may increase if there is sufficient demand, and earlier reports had indicated that Alibaba was trying to raise up to $4 billion. (previous post) Alibaba gives the usual line that the cash will be used for general corporate purposes, with no additional comment.

The previous reports had said the list of 8 lead banks included many of the industry’s top names, such as Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan in North America, Credit Suisse and Deutsche Bank in Europe, and Mizuho in Japan. Shareholder reaction to the actual announcement was relatively muted, with Alibaba shares down 0.6 percent in regular trade that day and mostly unchanged in after-hours trade.

But the stock has rallied about 7 percent since news of the loan first came out, so this latest pull-back probably isn’t that significant. Instead, investors will probably be watching closely to see where the loan amount ultimately tops out, which will indicate investor appetite for the company’s shares over the next 5 years.

If Alibaba meets the $4 billion target, that could boost sentiment for its stock that has been a relatively laggard over the last year, and now trades at a significant discount to Tencent (HKEx: 700), China’s other top Internet company. I suspect that Alibaba has already lined up more than the $3 billion lower threshold it’s officially announcing for the loan, and maybe even has $4 billion in commitments, in hopes of getting a sentiment boost from beating its officially announced lower target.

What’s the Motivation?

While the final loan amount could affect Alibaba’s stock in the very near-term, the reasons behind this new fund-raising could have a longer term impact. Alibaba has been a very acquisitive company lately, spending more than $700 million in the last 3 months of 2015 alone. But that said, the company also had $18 billion in its coffers at the end of last year, meaning it’s hardly in need of major new funds.

That’s led me to speculate that perhaps Alibaba is lining up funding to buy up the large stake of itself currently held by former strategic partner Yahoo (Nasdaq: YHOO), which should now be worth about $24 billion. Alibaba’s current cash pot plus the new bank loan would be nearly enough to buy out the stake outright, though Alibaba could easily find other backers to help with such a buyout.

Yahoo and Alibaba originally formed their tie-up about a decade ago, when the former paid $1 billion for 40 percent of the latter. But the alliance quickly soured and later became mostly a financial relationship, with Yahoo gradually selling down its stake. Most recently Yahoo’s remaining stake in Alibaba has become a headache for both companies.

For Yahoo the stake is distracting as it tries to turn around its struggling core search business. For Alibaba it creates a worrisome overhang that could potentially release huge amounts of its stock into the market. Thus a buyout of the shares by Alibaba would make sense for both sides, and Alibaba could quickly recoup most of its money by selling a lot of the stake to big institutional investors.

Another possibility could be a play for faded group buying site Groupon (Nasdaq: GRPN), following Alibaba’s disclosure last month that it had bought 5 percent of the company’s shares on the open market. Groupon’s shares have nearly doubled since Alibaba first disclosed its investment, as traders bet on a closer alliance between the 2 companies.

At the end of the day, I would put chances for a Groupon bid a bit higher than a Yahoo stake buyout, though I would still peg a Groupon bid at only 50-50. All of this guessing is probably exactly what Alibaba wants observers to be doing right now, as it tries to generate some buzz in the face of slowing growth for its core e-commerce business and a global expansion story that isn’t going anywhere fast.

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