RPT-UPDATE 1-Alibaba forges tighter Alipay bond with new pact

Tue Aug 12, 2014 9:21pm EDT

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By Deepa Seetharaman

SAN FRANCISCO Aug 12 (Reuters) - Alibaba Group Holding Ltd IPO-BABA.N overhauled its pact with the parent of fast-growing payments affiliate Alipay, boosting the Chinese e-commerce giant's potential gains if that company is sold or goes public.

The revised deal strengthens ties between Alibaba and Alipay, which is crucial to powering online e-commerce but became the subject of controversy after it was spun off separately. That move spurred protests from major shareholders Yahoo Inc and Softbank Corp and led to a framework agreement in 2011.

The new deal, entered into on Tuesday and replacing the original framework, comes as Alibaba prepares to hit the road next month to convince U.S. investors to participate in its initial public offering in New York later this year.

Alibaba said on Tuesday it agreed to sell its small and medium enterprise loan business for $518 million in cash to Alipay's parent, the Small and Micro Financial Services Company.

Forging a stronger bond with its fast-growing payments affiliate may help Alibaba execute what could be the largest-ever IPO of a technology company in history.

Alipay, often compared with eBay Inc's PayPal, is a crucial service for Alibaba's core business. At the end of last year, Alipay had nearly 300 million real-name users, or nearly half of China's 618 million internet users, the company said. Its users completed 12.5 billion transactions in 2013.

The revised deal unveiled on Tuesday removes the $6 billion limit on Alibaba's gains if Alipay's parent goes public, "significantly increasing the potential future financial benefits to us," according to an amended IPO document filed with the U.S. Securities and Exchange Commission.

Alibaba is also entitled to 37.5 percent of the parent's pre-tax profits. Previously, Alibaba was slated for 49.9 percent, but only of Alipay's pre-tax income.

That might mean more money for Alibaba, given that Alipay's parent company will own the loans business, in addition to fund management, insurance and other businesses.

And if Alipay's parent gets approval to operate as a partly foreign owned financial services company in China, Alibaba will be able to take up to a third of the company.

On Tuesday, Alibaba noted that CEO Jack Ma's control of Alipay may give rise to conflicts of interest in future.

"Conflicts of interest may arise due to Jack Ma's role as executive chairman of our company and through his voting control over and his economic interest in Small and Micro Financial Services Company, and he may not act to resolve such conflicts in our favor." (Reporting by Deepa Seetharaman; Editing by Chris Reese and Andrew Hay)

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