FINANCE: SOEs Squash Ant Financial Valuation

Bottom line: Ant Financial is likely to get a low valuation from its new private placement due to the exclusion of foreign investors, but could see the figure reach up to $70 billion by the time of its 2017 IPO if it can rapidly build up its new services.

SOEs squeeze Ant Financial’s valuation

Yet another report has come out about an ongoing private placement by Ant Financial, saying the financial services affiliate of e-commerce giant Alibaba (NYSE: BABA) is now planning a domestic IPO in 2017. That’s a little later than was indicated in previous reports, which were probably a little too optimistic about a company whose various businesses are mostly less than 2 years old.

But the more interesting element in this recent flurry of reports has been what valuation the new private placement will bring for Ant, which is financially separate from the New York-listed Alibaba. Some of the earlier reports indicated Ant could be valued at up to $50 billion, which admittedly looks quite optimistic for a firm at its stage of development. But now the latest reports are bringing the number down sharply, saying the new funding will value Ant at between $35 billion and $40 billion.

So, what exactly is happening here and why are the valuations varying so widely? To begin with, valuing companies is always a tricky business, especially when they’re just getting started in many new businesses. That’s certainly the case for Ant, whose main money earner right now is Alipay, the electronic payments system that was previously spun off from Alibaba due to Beijing rules banning foreign ownership of such companies.

Ant’s other assets are likely to include Yu’ebao, an investment service that competes with traditional bank savings accounts for deposits from general consumers; and a new private online bank now being set up by Alibaba and several partners, who recently received a license under a trial government program aimed at injecting more private money into China’s banking sector.

Ant Financial was only formally launched last year, and splashed into the headlines about a month ago when the first news reports emerged saying the company was in the process of negotiating a private placement that could value it at up to $50 billion. (previous post) But just days later, a report in the influential financial publication Caixin  put Ant’s value much lower, at around $30 billion.

This latest report with the $35-$40 billion valuation is in the middle of those 2 extremes, and shows that some intense negotiating is going on behind the scenes. The latest reports, which cite state-run media, say that only big state-run firms are being considered for the investment, which perhaps helps to explain the lower valuation. (English article)

One of the previous reports had indicated that some of the big state-owned investors bidding for a piece of Ant included China’s Postal Savings Bank, the country’s state-backed social security fund, and another fund connected to policy lender China Development Bank. The fact that only big state-owned entities are vying for the stake, which will total around 11 percent of Ant, is probably due to the restrictions that I mentioned above on foreign ownership.

Such restrictions mean that Ant will have to turn to a much smaller pool of potential big investors in the run-up to its IPO. That means big global names like Digital Sky Technologies (DST) and Carlyle won’t be able to invest. That will hurt Ant because such foreign investors are quite bullish on this kind of company, and undoubtedly would have given it a much richer valuation than what it will get from these big state-owned institutional buyers.

But this is China, and there’s not much that Alibaba chief Jack Ma, who also happens to be a major stakeholder in Ant, can do to change the situation. Accordingly, we can probably expect to see Ant get a relatively low valuation closer to the $35 billion figure when the private placement is finalized. But that number could still double in the run-up to the 2017 IPO if Ant can quickly build up its new banking and other financial services businesses.

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