February 7, 2018 / 3:01 AM / 4 months ago

Breakingviews - Alibaba’s reunion with Ant Financial is heartening

HONG KONG (Reuters Breakingviews) - Alibaba’s reunion with Ant Financial is heartening. The reshuffle, unveiled late last week, sees Jack Ma’s $474 billion e-commerce goliath take 33 percent of the financial technology group. That simplifies the duo’s relationship, draws a line under a controversy, and heralds a likely flotation.

An employee stands next to the logo of Ant Financial Services Group, Alibaba's financial affiliate, at its headquarters in Hangzhou, Zhejiang province, China January 24, 2018. Picture taken January 24, 2018. REUTERS/Shu Zhang

Alibaba is acting on a 2014 option to switch from collecting 37.5 percent of Ant’s pre-tax profits to holding a direct stake. No cash will change hands but Alibaba transfers some intellectual property.

The move clears the way for Ant to float in China: market watchdogs would probably have rejected a tech firm that did not own some of the IP critical to its operations. This will be a huge deal, since as well as its Alipay service that process most Alibaba transactions, Ant spans online banking, consumer credit and the world’s largest money-market fund. It was valued at $60 billion in 2016.

This also concludes a saga that has dogged Ma since 2011. He transferred Alipay out of Alibaba into a Chinese vehicle he controlled. Yahoo, an outraged shareholder in the then-private parent company, said the board knew nothing of the deal. Ma cited looming restrictions on foreign investors in Chinese payment firms. But those curbs never materialised. He later struck two profit-sharing agreements giving Alibaba part of the spoils.

Shareholders now get back an equity stake representing just a third of an expanded business. Alipay now belongs to a far bigger group, Ant, which has spread into areas that might not have been permissible had it been fully owned by Alibaba. If Ant’s stock achieves a high valuation in China, Alibaba shareholders will also benefit indirectly too.

The fact that Alibaba is moving now also suggests regulators are softening on outfits that strictly might be considered overseas investors. It has a New York listing and uses so-called “variable interest entities” – a legal workaround for foreign-investment restrictions in sectors like technology. Peers Tencent and JD, which also have overseas listings and onshore financial affiliates walled off from the public companies, will probably follow Ant’s trail.

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