A SIX-WAY split of Alibaba Group Holding Ltd means the value of China’s largest eCommerce player will be increasingly divorced from its actual operations, depending instead on equity-market assessments of the units it spins off.
That would make the first few initial public offerings (IPOs) – when they happen – crucial to the conglomerate’s future.
Commencing April 1, each division has had an independent chief executive officer and has been responsible for its own performance.
“The market is the best litmus test, and each business group and company can pursue independent fundraising and IPOs when they are ready,” chairman Daniel Zhang told employees in a March email outlining the changes.
That announcement fired the starting gun for a race to list shares.
These separate entities include global commerce, local services, logistics, cloud, and digital media and entertainment.
Its flagship online shopping business Taobao Tmall will remain a fully-owned part of the parent, meaning that Alibaba Group’s main business will return to primarily providing eCommerce services in China.
Logistics unit Cainiao might be first, according to one report. The global commerce business, which includes Lazada and AliExpress, is also making preparations to list, Bloomberg News wrote last month.
The first is said to be valued at US$20bil (RM90bil), while brokerages have ascribed prices ranging from US$29bil (RM130bil) to US$39bil (RM175bil) for the latter.
Truthfully, we have no idea what each of these Baby Babas is worth, which is where the process of raising shares in the public markets is so crucial.
For the past decade, Alibaba’s Chinese eCommerce business – Taobao Tmall under the new structure – has propped up the rest of the company amid multi-billion dollar bets on overseas expansion and a spread into new sectors.
Each of these five other units is a money-loser, yet collectively they could account for around half of Alibaba’s market value.
Alibaba is splitting off business units equal to almost half its value.
It’s impossible to take a traditional price-to-earnings approach since they have no earnings. Yet using price and sales of industry peers and the reported revenue of each unit we can take a stab.
On this basis, Cainiao would be worth around US$10bil (RM45bil) and global commerce around US$12bil (RM54bil), according to a Bloomberg Opinion analysis based on peer-group valuations.
Add up all the divisions plus cash on hand and you get a total value of US$225bil (RM1.01 trillion), which is not far off the market capitalisation of Alibaba’s New York-traded depositary receipts.
That’s a disappointing figure, though.
A key reason for the breakup is to unlock value since large variegated companies tend to trade at a steep discount to the sum of their parts.
SoftBank Group Corp is a great example, with chairman Masayoshi Son constantly bemoaning the fact that his Japanese technology empire trades well below its net asset value.
SoftBank is chronically undervalued by public-market investors. Deciding precisely which rivals to take as a comparison, and what valuation ratios to use is as much art as science.
The high-growth, zero-profit nature of these businesses makes them akin to startups, and investors often go by gut. They’re also likely to be guided by sentiment.
Shares of Alibaba and peers, including Tencent Holdings Ltd, JD.com Inc and Meituan, have been battered by the Covid-19 pandemic, a crackdown by Beijing and a slowing Chinese economy.
But retail and portfolio investors may be enthused by the chance to invest in a hot business with high-growth potential.
If the first IPO is a blockbuster then the excitement could be contagious and boost prospects for subsequent listings.
The reverse could also be true, with a flop likely to make it tough to sell the next spinoff. Unfortunately for Alibaba and its bankers, the choice may not be entirely in their hands.
Chinese regulators have been watching IPOs like a hawk. Beijing nixed the Hong Kong listing of financial technology affiliate Ant Group Co and forced Didi Global Inc to reverse course after already debuting in New York.
Even so, the government may be eager to ensure this series of divestitures and listings are successful. Chinese regulators have already made their point – big tech is not too big to fail – and companies have been brought to heel.
Now would be a good time to boost morale in capital markets and among the nation’s retail investors.
Instead of being the big conglomerate that needs to be controlled, Alibaba Group might well be the source of renewed optimism in an economy that could do with some good news. — Bloomberg
Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. The views expressed here are the writer’s own.