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Alibaba is separating itself into six businesses, most of which will pursue their own IPO, in the hope of unlocking value.
 

Alibaba to split into six businesses

Alibaba outlined plans in March 2023 to split itself into six different business units, each of which now has its own independent management and will consider pursuing its own initial public offerings (IPOs) and raising its own cash for development.

This represents the single biggest shake-up to Alibaba in its 24-year history. Hong Kong is expected to be the prime location for any listings given most of the businesses are geared toward China. Although Alibaba is listed in Hong Kong and the US, it is not expected to list its spin-offs in the US due to the threat posed by rising US-China tensions.
 

Alibaba IPOs: What businesses are being spun off?

This will ultimately see Alibaba spin-off business units covering retail, cloud computing, e-commerce, local services, and food delivery in China, logistics, and digital media and entertainment.

That will leave today’s Alibaba with its core Taobao and Tmall e-commerce platforms in China, with the firm becoming a holding company with stakes in the businesses being separated. As we can see below, this leaves Alibaba with its single biggest revenue generator and one of the only parts of the business that makes a profit while its smaller, mostly loss-making businesses will be spun-off.

Below is an outline of where Alibaba makes its revenue and the level of growth delivered by each unit in the year to the end of March 2023.

(Click on image to enlarge)

(Source: Company reports)

Let’s have a look at each individual unit and how and when they will be spun off from Alibaba.
 

Alibaba IPOs: Freshippo

Freshippo is Alibaba’s retail business that was launched in 2016, offering groceries and fresh goods to consumers both in its hundreds of stores across China and online. It boasts a proprietary fulfillment system that allows customers living close-by to stores to receive their orders within as little as 30 minutes.

This could be the first division to complete a successful IPO over the next six to 12 months, suggesting a listing could occur between November 2023 and May 2024. Alibaba has said Freshippo has a ‘clear path to profitability’ and is therefore ready to go public.
 

Alibaba IPOs: Cloud Intelligence Group

The Cloud Intelligence Group is Alibaba’s cloud-computing arm that also includes its artificial intelligence projects, business collaboration software DingTalk and other businesses.

This unit will be separated before May 2024 and shares in the business will be distributed to Alibaba shareholders through a stock dividend. It will eventually pursue its own listing and go public but plans to first raise cash through private financings from external strategic investors. The stock dividend means Alibaba is completing a full spin-off here, which means it will not benefit from future cash flow or growth.

This is the only other profitable part of Alibaba’s empire at present and hopes are high. In fact, CEO Daniel Zhang has said he believes the cloud computing business can grow to be ‘as big, and perhaps even bigger than, the Alibaba Group’ is today.
 

Alibaba IPOs: Cainiao Smart Logistics Network

The Cainiao Smart Logistics Network was established in 2013 and is currently the driving force behind Alibaba’s logistics, responsible for fulfilling consumer orders on its e-commerce platforms in both China and overseas. It will continue to provide logistics and delivery services for Taobao, Tmall, and the international commerce arm.

Importantly, Alibaba does not wholly own Cainiao and has a 67% stake, with the balance being owned by strategic investors and institutional investors.

The business is exploring an initial public offering over the 12 to 18 months, suggesting a listing could happen between May to November 2023. Reuters reported that it could look to raise between $1 billion to $2 billion through a Hong Kong listing in early 2024, according to unnamed sources. Alibaba has said it has a differentiated customer value proposition, a stable and well-defined business model, and is on its way to escaping the red, making it primed for a listing.
 

Alibaba IPOs: Local Services Group

The Local Services Group includes an array of apps and services that provide services and on-demand delivery across China. This includes its food-delivery platform Ele.me and its mobile digital mapping service Amap.

Alibaba has not yet confirmed the timeline for a spin-off of the Local Services Group.
 

Alibaba IPOs: International Digital Commerce Group

The International Digital Commerce Group is made up of Alibaba’s overseas e-commerce platforms outside of China. This includes Lazada, AliExpress, Trendyol, Daraz, and other businesses.

Alibaba has said it is currently exploring the potential for the business to raise its own external capital to support its development and growth in the hope it can enter new geographical markets, invest in new tech and broaden its offering. However, Alibaba has not yet confirmed the timeline for the spin-off of the International Digital Commerce Group.
 

Alibaba IPOs: Digital Media & Entertainment Group

The Digital Media & Entertainment Group homes an array of apps and services covering online video, digital content, film, gaming, music, and live streaming. This includes video sharing platform Youku and film production firm Alibaba Pictures.

Alibaba has not yet confirmed the timeline for the spin-off of the Digital Media & Entertainment Group.
 

Alibaba to turn into a holding company focused on e-commerce

The spin-offs will leave today’s Alibaba left with its core Taobao and Tmall e-commerce operations in China, which will remain wholly owned by the company.

It plans to retain stakes in the businesses being listed, apart from the cloud computing arm. We do not know what level of control Alibaba will retain in each unit, but some analysts – including those at Bloomberg Intelligence – believe it will keep controlling stakes that will leave it in charge of its array of businesses, at least during the near term.

‘However, the nature of the relationship will change. Alibaba will be more in the nature of an asset and capital operator than a business operator in relation to the business group of companies,’ said Bloomberg Intelligence.

Alibaba had around $81.6 billion in cash at the end of March 2023, far outstripping debt and giving it a favorable debt-to-equity ratio despite the hit its share price has suffered in recent years. This gives it huge firepower as it enters a new era, although there will be some concerns about the impact the separation will have on cash flow over the longer term.

‘Tens of billions of dollars in cash and cashflow, negative net debt, and near-term regulatory headwinds turning to tailwinds support its financial strength. Yet over time, as IPOs are done and assets are spun off, credit-rating risks are likely to rise. The eventual unwinding of Alibaba’s new holding company likely results in less financial flexibility, fewer cashflow generating assets, and higher leverage over time,’ said Bloomberg Intelligence.
 

Alibaba IPOs: Why is Alibaba spinning off businesses?

Alibaba has said separating individual business units will make each one more agile and empower them to make decisions and react to market changes quicker. Empowering each individual business should give them greater flexibility and allow them to grow quicker.

Alibaba shares are trading lower today than they were before the pandemic started in 2020, despite the fact that China has put Covid-19 behind it and ended its regulatory crackdown on internet and tech companies that have plagued the industry over the past couple of years.

Plus, Alibaba currently trades at a blended forward price-to-earnings ratio of just 10.1x, according to data from Bloomberg. That is less than half the industry mean and below the valuations boosted by Chinese rivals like JD.com and Pinduoduo.

With all that in mind, Alibaba’s low valuation has prompted the company to undertake a radical shake-up in the hope of unlocking value for both the business and its shareholders. This is the ‘sum-of-parts’ approach that will see each individual business valued on a standalone basis rather than as a whole.

It could also alleviate any hangover from the regulatory pressure that has weighed on the stock in recent years as it loosens control over its sprawling empire and provides greater governance to each individual unit.
 

Alibaba IPOs: Will they be a success?

Alibaba will have to tread carefully as it looks to complete a series of listings. Currently, global IPO markets are subdued as companies continue to delay their plans to go public due to the high level of uncertainty lingering over the markets, plagued by higher interest rates and persistently high inflation, leaving them fearful that they won’t be able to attain sufficient valuations.

‘The market is the best litmus test, and each business group and company can pursue independent fundraising and IPOs when they are ready,’ Alibaba CEO Daniel Zhang said.

However, we know that the Chinese IPO market is proving more resilient. In fact, Chinese IPOs have raised more than five times as much money as US listings since the start of 2023 as the reopening of the Chinese economy encourages companies to take the plunge. Still, the amount raised by Chinese companies this year is lower than what we saw in 2022, suggesting this is a case of Western markets remaining overly subdued rather than a reflection of an explosion in IPOs in China.

With that in mind, Alibaba will have to get the timing right. The success – or failure – of the first IPO could feed through to the subsequent listings and dictate the sentiment and mood around Alibaba’s breakup. That is all the more significant considering most of the companies being spun off are still in the red and burning through cash. They may be underpinned by their growth prospects, but markets are currently more interested in resilient companies that can churn out profit and generate cash in tougher times.

That explains why the businesses already making money, or at least on their way into the black, are the first set to go public. The focus will be on reducing costs, improving efficiencies, and making each business as attractive as possible before any IPO – although a slowdown in growth for most of its businesses will make this all the more difficult and poses questions about their viability and chances of thriving once cut off from Alibaba.

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