Alibaba in bumper Yahoo buyback

Securing a financing package for the buyback of a partial stake in itself from Yahoo concludes a busy 12 months for Alibaba Group. In addition to the Yahoo agreement, the Chinese e-commerce giant has privatized its B2B trading platform and facilitated the exit of employees and early investors in the parent company.

All told, Alibaba has completed more than $12 billion in M&A and other financing. About half is equity that has gone to private investors.

For China Investment Corporation (CIC), Boyu Capital, CITIC Capital, CDB Capital, Silver Lake, DST Global, Yunfeng Capital and Temasek Holdings - as well as numerous undisclosed parties - it represents a golden opportunity to participate in one of China's largest privately-held companies. As part of the agreement with Yahoo, Alibaba is committed to pursuing an IPO, which means an exit channel is guaranteed, even though it might not be utilized for several years.

"There is nothing like working with someone as a partner and trying to solve a problem," Ken Hao, head of Silver Lake in Asia, told AVCJ earlier this year, regarding the private equity firm's initial investment in 2011. "Alibaba wanted to wait longer before going public and they reached out to parties that could add value to the company as long-term investors."

Rising valuations

Silver Lake and DST Global teamed up to lead the employee liquidity event last year. Heading a consortium that also included Temasek and Yunfeng, an investment firm set up by Focus Media's David Yu and Alibaba founder Jack Ma, they paid $2 billion for a 5.7% stake. It valued the entire company at $35 billion.

As of last week, Alibaba is worth about $40 billion, based on the value of common equity and convertible preference shares issued to finance the repurchase of half of Yahoo's 40% stake in the company.

The $7.6 billion deal was supported by $5.9 billion in financing, of which $3.9 billion was equity. CIC led the private funding on this occasion, with Boyu, CITIC Capital and CDB Capital coming in as new investors, while the likes of Silver Lake, DST and Temasek raised their holdings. CIC is said to have put in $2 billion on its own.

According to sources familiar with the transaction, negotiations with CIC had been going on for more than a year and the sovereign wealth fund was ready to move on a deal much earlier. However, it took longer than expected for Alibaba and Yahoo to reach an agreement. Boyu worked closely with CIC from the outset, advising the sovereign fund and generally helping to facilitate the transaction, says one source. The other private equity participants came in later and there was no shortage of interest.

There was a similar level of willingness to cover the $2 billion senior debt portion of the deal. China Development Bank (CDB) provided half with the other half coming from a consortium of international banks, including ANZ, Barclays, Citi, Credit Suisse, DBS, Deutsche Bank, Mizuho and Morgan Stanley.

As a policy bank, CDB is encouraged to back transactions that are seen to be in the national interest, but in this case it was by no means a lender of last resort.

"Commercial banks would have stretched to the full amount," says David Winfield, head of finance for Asia at Freshfields, legal advisor to Alibaba. "But to get a portion of that capital from one source makes the transaction easier. And when CDB comes in and it wants to support your business, that's a great signal."

There were two principal challenges: structure and timing. In terms of structure, Alexandra Korry, a partner at Sullivan & Cromwell, which represented CIC, Boyu, CITIC Capital and CDB Capital, notes that the sheer number of parties involved complicated the transaction. "There were lots of pieces that had to be aligned," she says.

Another consideration was international investors' concerns about China risk, particularly where offshore debt is secured against onshore assets.

Alibaba likely overcame these concerns due to the quality of its assets. With businesses including B2B trading platform Alibaba.com, online shopping sites Taobao and Tmall, and electronic payment system Alipay, the company is a dominant player across the B2B, C2C and B2C spaces, as well as controlling a major channel through which purchases are transacted.

Will they, won't they?

The timing of the deal was trickier. The company set out to finance the $2.5 billion purchase of the 27% in Alibaba.com that it didn't already own and the buyback from Yahoo in parallel, but it was unclear which would come first.

Negotiations between Alibaba and Yahoo were protracted due to a combination of past tensions between the two companies, the size of Yahoo's stake in Alibaba as a proportion of its own market capitalization, tax considerations in structuring the transaction, and the US firm going through four CEOs in three years as it struggled with its core business.

Yahoo will receive $6.3 billion in cash, $800 million in preference shares, and $550 million in patent and licensing payments. Its remaining 20% stake in Alibaba is worth $8.1 billion and the Chinese company has the right to repurchase half of it at time of IPO. Yahoo paid $1 billion plus its China assets for the full 40% stake in 2005.

Alibaba claims the buyback financing package is the largest ever private facility for an independent Chinese company and the largest non-leverage buyout private financing for a technology company globally. Pulling it off was impressive, but industry participants are reluctant to tie the achievement to any wider trends.

"I'm not sure it says that much about the wider market," says Freshfields' Winfield. "There is a particular interest in Alibaba because of its success and because of the potential of e-commerce. It appeals to debt and equity investors."

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• Topics
• Technology
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• Greater China
• Buyouts
• TMT
• Alibaba Group
• Boyu Capital
• CIC
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• buyout