Alibaba Restructures Alipay Relationship Ahead of IPO

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.

As part of Tuesday’s deal, the value of Alibaba's interest in (SFMSC) and Alipay will also no longer be capped, according to an amended F-1 filing with the Securities and Exchange Commission. Alibaba is currently due a payment of 37.5% of the value of SMFSC and Alipay in the event of an initial public offering or sale of the company. While the value of that payment had been capped at $6 billion, it is now effectively un-capped.

In fiscal 2014, Alibaba received $390 million in other income from Alipay as a result of its profit sharing agreement. The company has the right to take a direct ownership in SMFSC, however, it doesn't currently expect to make such a move given regulatory hurdles in the Peoples Republic of China.

Tuesday's restructuring of Alibaba's financial services businesses comes ahead of the company's long-anticipated initial public offering.

The IPO, which could be the largest in U.S. history, was initially speculated to happen in August. Now, it appears that the offering may come after the Labor Day holidays as investors return from summer vacation.

Alibaba has hired six underwriters, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley and Citigroup, to lead its U.S.-based IPO. The company will list its shares on the New York Stock Exchange.

Read More: Alibaba Underwriters Go From Alpha to Beta

Read More: JD.com Founder's $591 Million Payout

-- Written by Antoine Gara in New York

Follow @AntoineGara

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