Alibaba.com, the provider of China’s leading online trading platform, has hired Credit Suisse and Morgan Stanley to help it spin off its partially owned HiChina Group unit for a separate listing in the US, according to sources.
Hong Kong-listed Alibaba.com said in a statement earlier this week that HiChina’s offering documents are currently under review by the relevant securities regulatory authority in the US and sources added yesterday that the company is aiming for a public offering and listing in the fourth quarter. The exact timing will depend on the broader market environment, however.
The public offering could raise between $100 million and $150 million, they said.
HiChina provides internet infrastructure services to small and medium-size enterprises in China, including domain name services, traditional hosting services, cloud-based services and website building solutions. The idea is to help its customers to establish a presence and conduct business online.
Alibaba.com acquired an 85% stake in HiChina in December 2009 from the founding shareholders for Rmb435.3 million ($63.8 million) in cash. It also entered into a series of agreements which may result in it increasing its stake to up to 99.67% by 2013, in which case the total consideration will increase to Rmb539.8 million. The acquisition of additional shares is tied to HiChina triggering certain performance milestones in the three-year period from 2011 to 2013.
Alibaba.com didn’t elaborate on why it is looking for a separate listing for HiChina, but it is likely that the unit needs additional funding to continue to grow. Alibaba.com said earlier this year that HiChina will be committing more resources to developing its own sales team and will also put more focus on services outside of its core domain name service.
In 2010, HiChina contributed greatly to a 700% increase in “other revenue” to Rmb425.5 million, according to Alibaba.com’s latest annual report. But it was also partly responsible for the 74.2% increase in the cost of revenue to Rmb931 million, mainly due to the cost of acquiring domain names.
According to the annual report, HiChina had about 2.1 million domain names in service and the total number of paying members for non-domain name services was around 270,800. This customer base is largely distinct from that of Alibaba.com, which presents potential synergies for long-term development, the company said.
The parent company also didn’t provide any details of the size and structure of the planned offering, but said it intends to provide its existing shareholders with an assured entitlement.
It is interesting that Alibaba.com is choosing to list HiChina in the US. Of course, a lot of other internet companies are already listed there, or are planning a listing, so from that perspective, it makes a lot of sense. However, there has been a bit of a backlash against Chinese companies in the US after allegations of fraud and poor accounting practices at several firms surfaced earlier this year.
Also, when Alibaba.com went public in Hong Kong in October 2007, its choice of listing venue was heralded as the deal that could potentially convince more Chinese internet-related companies to list in Hong Kong. That hasn’t really happened and the fact that the Alibaba group is choosing the US when it is taking its second company public should effectively put an end to that debate.
There was certainly no lack of buyers for the company that was founded by Chinese internet personality Jack Ma when it listed in Hong Kong three years ago though. The $1.5 billion IPO attracted more than 1,200 institutional accounts from around the globe and a retail subscription of HK$452 billion ($58 billion), making it the most popular Hong Kong IPO among retail investors at the time.
However, one of the issues that intrigued investors at the time was the fact that Alibaba.com wasn’t primarily a play on the China consumption story, which made it stand out from most other Chinese technology or Internet companies. Rather, Alibaba’s focus on international trade makes it a more direct leveraged play on China’s economic growth. Of course, with concerns about growth – both globally and in China – having dominated the discussion pretty much since the financial crisis, that argument has lost its appeal.
And indeed, Alibaba.com’s share price has tumbled 82% from its highs just below HK$40 in November 2007. The stock closed at HK$7.32 yesterday, which is near its 2011 low and 46% below its IPO price of HK$13.50.