The Alibaba show(2)

Alibaba’s tricky PE-led buyback of Yahoo! shares was China’s largest private deal ever – and the Chinese side delivered a stand-out performance before a global audience.

Last year, the Eurozone crisis intensified, China’s GDP growth slowed and the pumped up Facebook IPO deflated.

Against that backdrop, raising $7.6 billion in private capital for a Chinese internet business seemed like a big ask. But Alibaba Group, China’s largest e-commerce company, did exactly that. Last September, it completed a private equity-driven $7.6 billion buyback of about half of Yahoo!’s 40 percent ownership stake.

The total deal actually involved $10 billion in transactions, and was composed of five distinct yet overlapping parts, explains Alibaba’s CFO Joseph Tsai. The M&A component included a $2.5 billion take-private of Hong Kong-listed Alibaba.com (the B2B e-commerce subsidiary) in June 2012. Then there was the Yahoo! share buyback, which was being negotiated simultaneously. 

Raising debt, convertible and equity tranches made up the other three parts of the deal. “Altogether we were executing five deals and all had to be coordinated with different parties with different interests in different jurisdictions,” Tsai says.

Alibaba wanted an investor group led by Chinese parties, so began talking to private equity in early 2012. The group included CIC International, Boyu Capital and CITIC Capital, as well as CDB Capital, the equity investment arm of China Development Bank (existing investors Silver Lake, Temasek and Digital Sky Technologies also participated).

“Part of the rationale for the buyback was to reduce the foreign shareholding and increase the level of shareholding by Chinese entities,” Tsai says. “The problem was, we had rounds of negotiations with Yahoo! the prior years and never really had a deal – but we couldn’t tell the PE guys we needed the capital until we had a deal locked up. So it was a chicken and egg problem.”

Concurrently, the company was moving to line up $2.5 billion from a consortium of banks to privatise its Hong Kong-listed subsidiary. (In Hong Kong, a take-private deal requires upfront capital commitments – unlike the US, where capital can be raised after the deal is announced). 

Negotiating multiple financing sources came with complications. Some investors wanted special rights that were at odds with what other investors wanted, says Alibaba’s general counsel Tim Steinert. In addition, the equity and convertible financing had to be piped into escrow in New York prior to the debt financing. Then it would all be released to Yahoo at one time. 

“It was a complicated escrow structure because of the number and different types of investors,” Steinert says. “Among other things, different people had different views on what level of protection people paying in first should get as opposed to people paying in later.

The big lender was CDB, which provided $2 billion. “The practices of Chinese banks are different in a number of ways from what we’re used to with international commercial banks,” he says (although none of those differences could be considered show-stoppers).

The Chinese side, led by CIC, which was represented by Sullivan & Cromwell, and Boyu Capital, had “international class execution”, he adds.

The takeway from Alibaba’s financing feat is that Chinese investors can execute large, complex international deals without major snags. This was the largest ever private financing for a private sector Chinese company, and it closed in roughly one year, which Steinert says is about standard for large M&A.

With founder Jack Ma due to step down as chief executive officer this year, rumours are rife that an IPO may be in the offing for the $40 billion-valued Alibaba. So stay tuned for the next installment of the show.