Alibaba IPO: Could be the biggest ever

Sometime soon, perhaps in a few days, Chinese e-commerce giant Alibaba Group Holding will file for an initial public offering that could be the largest ever.

The company and its bankers are reportedly moving to throw their own shares behind the deal, pushing the IPO's projected value well past the $20 billion mark. Alibaba's IPO ultimately might top not only Facebook's $16 billion 2012 listing, but even Agricultural Bank of China Ltd's record $22.1 billion offering in Shanghai and Hong Kong in 2010, the Wall Street Journal reported. Visa Inc's $19.7 billion offering in 2010 is the largest IPO ever held in the US, according to IPO tracking site Dealogic.

The move also would generate extra cash to help a publicly traded Alibaba grow beyond China and take on rivals such as China's Tencent Holdings Ltd, the social messaging and video game company, and US Internet titans Google Inc and Facebook. On Sunday, Alibaba and founder Jack Ma's privately held Yunfeng Capital agreed to pay $1.22 billion for a combined 18.5 percent stake in video website Youku Tudou Inc. The purchase of the Internet broadcaster of popular television shows and videos was seen as the latest development in Alibaba's and Tencent's recent acquisition war, aimed at chipping away each other's core business.

Alibaba, often described as a combination of EBay and Amazon, handled $240 billion of merchandise in 2013. With more than 7 million merchants, it has more than $2 billion in revenue and profit of more than $1 billion.

Under the agreement, expected to close "in the near future", Alibaba will acquire a 16.5 percent stake in Youku Tudou. Yunfeng will take a 2 percent stake, buying 707.2 million new shares and 13.9 million existing shares at a price equal to $30.50 per American Depositary Share of the company's New York-listed stock. The deal values Youku Tudou's shares at a 26 percent premium to their Friday $24.14 Friday closing price. Alibaba CEO Jonathan Lu will gain a seat on Youku Tudou's board, under the pact.

Youku Tudou Chairman and CEO Victor Koo said in a release Monday that Alibaba's investment "will help us continue to build an immersive cultural entertainment platform that integrates online and offline entertainment". Ma, who has described the challenge of providing what he calls personal business as "my religion", said Alibaba is "excited to cooperate and work closely with Victor and his team to support their innovation in this key emerging space as well as accelerate our digital entertainment and video content strategy". He called the transaction "an important strategic initiative that will further extend the Alibaba ecosystem and bring new products and services to Alibaba's customers."

Alibaba US spokeswoman Ashley Zandy declined to discuss the IPO or the Youku Tudou transaction beyond what was said in the release. She said Alibaba's prospectus would clear up all questions when the offering is officially announced but declined to say when that might occur. Julie Fei, the global communications administrator with Los Angeles law firm O'Melveny & Myers LLP, which advised IVerge Holdings in the stake purchase, also declined comment "beyond what is in the press release."

In addition to challenging Tencent, Alibaba's IPO is seen as putting pressure on US e-commerce giant Amazon.com. Alibaba's revenue is a fraction of Amazon's because the Seattle company sells products to consumers. Amazon reported profit of $273 million last year on revenue of $74.5 billion. Alibaba, by comparison, had 2013 net income of $3.52 billion on revenue of $7.95 billion.

Nevertheless, in a Seeking Alpha investment website report headlined "Alibaba may be the Amazon killer", analyst Robert Wagner wrote that a "successful Alibaba IPO" would hurt the stocks of both Amazon and eBay, the companies closest in comparison to Alibaba.

Wagner wrote that Alibaba's sheer size would dampen Amazon's stock price if the Chinese company's shares were added to indexes and portfolios targeting e-commerce and related sectors. "Because Amazon and Alibaba are very similar in capitalizations, $168 billion versus $153 billion, Alibaba threatens to represent an equal weight in portfolios required to have exposure to the Internet retail sub-industry and general-retail industry," Wagner wrote. "To make matters worse, Alibaba doesn't only have real earnings, they have real earnings growth. Amazon simply doesn't measure up to the size of Alibaba's earnings and earnings growth rate."

Amazon's shares, Wagner said, have been "dramatically underperforming not only the S&P 500 but also the consumer discretionary, retail and Internet retail sectors." From the looks of things, the market "has already placed odds on Alibaba emerging the winner," the analyst wrote.

Last week, Amazon, the world's largest online retailer, reported strong quarterly growth, in line with Wall Street's expectations. The company earned $108 million, or 23 cents per share, meeting the expectations of analysts polled by Thomson Reuters. That's compared to a profit of $82 million during the same quarter last year. Overall sales came in at $19.74 billion during the quarter, slightly better than expected.

Bernstein analyst Carlos Kirjner calls Alibaba "a highly valuable asset", worth "much more than what we think was reflected in Yahoo's stock price." Web-portal company Yahoo is a 24 percent Alibaba shareholder.

Writing investors following Alibaba's better-than-expected 66 percent revenue jump in the quarter ended Dec 31, Kirjner called Alibaba's Taobao e-commerce website a particularly attractive asset. Taobao has about 800 million product listings from seven million sellers who pay Alibaba for advertising and other services. In 2013, the combined transaction volume of Taobao and another Alibaba-run shopping site called Tmall reached $240 billion.

"The total is more than double the size of Amazon.com Inc, triple the size of eBay and one-third larger than the value of all the transactions last year at the two US-based e-commerce giants combined", Kirjner wrote.

Kirjner projects a market value of as much as $245 billion for Alibaba. Even if the company's operating margins surge a projected 63 percent in the current fiscal year and 40 percent next, the analyst's estimates are "still quite conservative", he wrote. He forecasts "materially higher" net income for Alibaba in 2014 and 2015 and predicts Taobao and Tmall will deliver 2016 net income of $9.5 billion, up 28 percent from the projected 2015 profit of $7.4 billion.

michaelbarris@chinadailyusa.com