NEW YORK (TheStreet) – Alibaba has restructured its relationship with payments business Alipay in a move that gives the e-commerce giant a smaller exposure to financial services, but the potential to receive a larger pie of fees from those businesses.
Alibaba said on Tuesday it has disposed its SME loan business to Small and Micro Financial Services Company, which also owns Alipay, for a $518 million cash consideration and annual fees for seven years based on the average daily size of the SME loan portfolio. Between 2015 and 2017, Alibaba will receive a fee equal to 2.5% of the daily average loan balances of the SME business. For remaining years, Alibaba will receive an amount equal to its 2017 fee.
Overall, the disposition will allow Alibaba, which is partially owned by Yahoo! (YHOO), to focus on its core e-commerce business and eliminates the direct risks of carrying a loan portfolio on its balance sheet, the company said. Instead, Small and Micro Financial Services Company (SMFSC) and its Alipay arm will carry those risks, and realize any associated synergies.
Under the new terms of its relationship, Alibaba will also take a smaller portion of the pre-tax income generated by Alipay, but receive a larger portion of overall financial services payments streams given a new revenue sharing agreement that now includes all of SMFSC's businesses, including Alipay.
Under the previous agreement, Alibaba received 49.9% of Alipay's consolidated pre-tax income. Now, Alibaba will receive 37.5% of both SMFSC and Alipay's profits.
“We believe this will be beneficial to us in the long-term because, while the profit sharing percentage is lower, the profit pool that we are entitled to share will come from all of the current and future businesses operated by Small and Micro Financial Services Company,” Alibaba said.