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Friday, 31 October 2014

Up the Wasu

Alibaba triangular dealmaking adds to IPO quirks

Powerful insiders are the norm in internet companies. Alibaba’s tie-up with a digital TV company adds an extra twist. The Chinese e-commerce group, which is planning a U.S. listing, has signed a three-step deal with China’s Wasu Media that looks a little too clever for comfort.

The agreement to make and distribute content, announced on April 9, has logic. The two companies, both based in the city of Hangzhou, already make television set-top boxes together. Jack Ma, Alibaba’s colourful founder and chairman, has long talked of creating culture for China’s masses.

The financing of the deal is less logical. Alibaba will lend 6.5 billion yuan ($1.05 billion) to its co-founder Simon Xie at an 8 percent interest rate. He is investing the cash in a new vehicle, co-owned by Ma and another internet mogul, Shi Yuzhu. That vehicle in turn is investing in Wasu, in return for a 20 percent stake.

Alibaba hasn’t commented on the financial aspects of the deal. Nevertheless, there are two problems. First, it seems unnecessarily complex. If Wasu is a worthy partner, why doesn’t Alibaba invest directly? Twitchy Chinese regulators who closely monitor ownership of media companies may explain the need for such manoeuvres. But circumventing the spirit of the rules would hardly be encouraging.

Second, the spoils don’t appear to be evenly divided. If Wasu’s shares sink, Alibaba’s loan may be at risk, depending on the value of the collateral that Xie has pledged. If the shares rise, Ma, Xie and Shi apparently pocket the gains. They are already $245 million better off after Wasu shares rose 10 percent on April 9.

Privately held Alibaba doesn’t have to answer to public markets. And the transaction may include other terms which somehow share the trio’s gains with the rest of the company.

But the triangular deal shows how hard valuing Alibaba will be. One of the biggest questions for future investors is what happens if insiders’ interests differ from their own. Ma and his cohort have already proposed that key individuals retain the right to nominate board directors, a requirement that scuppered Alibaba’s chances of a Hong Kong listing. The Wasu deal demonstrates how blurred the line between public and private can become.

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Context News

Wasu Media, a Chinese company listed in Shenzhen, announced an equity investment of 6.5 billion yuan from a vehicle co-owned by two founders of Alibaba, China’s biggest e-commerce group.

The vehicle, Yunxi Investment, will be entitled to nominate two directors to Wasu’s board, and will emerge with a stake of around 20 percent in the enlarged company.

Yunxi is paying a price of 22.80 yuan per Wasu share. Wasu’s shares closed at 28.09 yuan on April 9, a 10 percent increase on the previous day’s close of 25.54 yuan.

To fund the investment, Alibaba’s Tmall unit will lend up to 6.5 billion yuan to Simon Xie, founder of Alibaba, as a representative of Yunxi Investment. The interest rate on the loan will be 8 percent, according to Wasu. Alibaba declined to comment on the terms of the loan.

Yunxi is 99 percent owned by Xie, though he is a limited partner in the vehicle. Jack Ma, Alibaba’s founder and chairman, owns less than 1 percent but is listed as the vehicle’s general partner, according to Wasu’s filings. The third investor is Shi Yuzhu, founder of games operator Giant Interactive.

Wasu also said it had signed a strategic co-operation with Alibaba to create original content, video messaging, games and music.

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