China's Alibaba is set to cast its considerable influence over Southeast Asian's online shopping channels after sealing a deal to buy a controlling stake in Singapore-based Lazada.
Alibaba said on Tuesday that it agreed to buy $500 million of newly issued shares from the online department store founded four years ago by German group Rocket Internet plus a further $500 million from existing shareholders.
Its acquisition of Lazada is understood to be the culmination of around six months of searching across Southeast Asia for a suitably complementary business
However, Lazada is also an obvious acquisition candidate for cash-rich Alibaba. Dubbed by some the Alibaba of Southeast Asia, business-to-consumer e-commerce company Lazada has enjoyed double-digit growth rates. So for some time it has been seen as one of Asia’s so-called unicorns -- venture-backed, privately owned companies believed to be worth more than $1 billion. There are not many of these around as they tend to go public quickly, once valuations soar.
The exact stake Alibaba is set to buy in Lazada has not been disclosed. But if it is assumed that it is buying 51% of the company, which includes $500 million of new shares, that would suggest Lazada was previously valued at $1.5 billion and is now worth around $2 billion.
That compares to a valuation of around $1.25 billion in November 2014, when Lazada raised €200 million (about $250 million) from a group of investors led by Singapore investment agency Temasek. Temasek is also an investor in India’s Snapdeal and China’s second-largest e-commerce firm JD.com.
Under the terms of the acquisition Alibaba has agreed to buy a 9.1% stake in Lazada from Rocket Internet for $137 million, another 8.6% from British supermarket company Tesco for $129 million, a 3.8% stake from Swedish investment company AB Kinnevik for $57 million, and an unspecified stake from Singapore investment agency Temasek.
Alibaba is expected to pay for the acquisition from its plentiful cash reserves.
After the deal Rocket Internet and Tesco will continue to have Lazada stakes of 8.8% and 8.3%, respectively, while Kinnevik will retain a 3.6% shareholding.
Rocket said that the $137 million it is set to earn from the share sale is some 15 times greater than the €18 million it invested in Lazada.
Rocket, Tesco, and Kinnevick also agreed a put-call arrangement with Alibaba, under which they can sell their remaining shares to the Chinese company within the next 12 to 18 months if the share price is at a fair market value.
Lazada’s appeal to Alibaba is underscored by the fact that it has built a solid commercial track record since it was established in 2012, as well as strong distribution capabilities and good brand recognition.
The business operates across Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. So the acquisition will give Alibaba valuable access to Lazada’s supply chain, distribution, and payment services across these countries.
“The markets that Lazada covers have 550 million people, so there’s a lot of growth opportunity,” a banker familiar with the talks said.
Lazada already has about 70 million active users, according to a source close to the company.
The company is currently believed to be making a loss as it seeks to build its business. However, Alibaba intends to solidify its sales channels across Southeast Asia through the purchase and will do so through a recognised brand.
The Chinese e-commerce giant, in particular, aims to marry its Chinese business suppliers with the fast-growing middle classes that are emerging in countries such as Malaysia and Indonesia.
“Alibaba wants to enhance the customer experience on the Lazada platform and grow it further,” the banker told FinanceAsia.
It intends to use the $500 million it plans to inject into the company via the sale of new shares to expand Lazada's business, with a view to turning it into Southeast Asia’s paramount electronic retailer.
Lazada is seen as the most international of Southeast Asia's online retailers and is probably the biggest, with an estimated market share of 20% as of 2014. However, many others exist in this small, highly fragmented market. Japan's Rakuten and Alibaba's own AliXpress, for example, operate B2C marketplaces in several Southeast Asian countries (although AliExpress is far smaller than Lazada in the region).
Meanwhile, in Indonesia MatahariMall launched to compete with its Singapore-based rival. Additionally, Alibaba competitor JD.com set up in Indonesia with JD.id.
However, online retail commerce as a whole in Southeast Asia was estimated to account for 1% of orders in early 2015, according to a report by AT Kearney. So the growth opportunities are huge.
Lazada also gives Alibaba an ideal platform upon which to expand its Alipay system.
Alibaba’s sole financial adviser on the M&A was Credit Suisse, while Goldman Sachs advised Lazada.
Additional reporting by Ray Chan
This story has been updated to reflect that Credit Suisse were the sole financial adviser of Alibaba.