Investors and traders are bracing for a potentially epic sell-off of Alibaba shares, with 429 million shares, or 18% of the company, eligible to hit the market on March 18. This marks the six-month expiry of lockups for select institutional investors from the company’s $25.03 billion jumbo initial public offering of September 18, 2014.
According to sources, a number of these investors are keen to sell and make a profit. Although it is unlikely they will all sell at once, the prospect is already weighing on the stock price.
Pre-IPO investors purchased shares at $68 per unit. Shares spiked to just under $100 a unit before closing at $93.89 on September 18, a 38% rise in its market debut. Later, they rose to a high of $119.15 on November 10 before coming down to the lower $100 range for the rest of the year. Alibaba finished the calendar year of 2014 up 52.8%.
So far 2015 is a different story. Shares are down 21% to $81.86 as of March 13 in New York, and could potentially drop further once the six-month lock-up expires on March 18 for some of the company’s largest investors.
Of the 429 million shares that become unlocked on March 18, some 100 million will remain subject to Alibaba’s trading restrictions until it announces its earnings results in May, the company said in a statement.
The anticipation that a large chunk of stock will hit the market on Wednesday has created an expiration overhang, and could send share prices down further.
Despite being down 21% year-to-date, shares are still well above the IPO price. Alibaba has thus far been able to keep its largest shareholders happy: pre-IPO investors are up 21% since inception. But some institutions may wish to jumpstart profit-taking ahead of the herd.
Managing volatility
Alibaba is said to be keen to maintain as much control over potential share sales as possible once the six-month lock-up expires.
Alibaba can’t prevent a sell-off, but the company or its bankers could organize a group of investors such as hedge funds or pension funds to buy a large block from institutions that seem keen to sell. Such a marketed follow-on would in theory offer new buyers access at a discount while giving sellers the chance to unload shares quickly without severe volatility.
But bankers judge such a move unlikely: a marketed follow-on for a such a well-known company is unnecessary. “Everyone’s an expert [on Alibaba],” one Hong Kong-based ECM banker told FinanceAsia.
It would also be difficult to organize such a large block without leaking information to the market.
Instead, some investors will probably sell smaller stakes and hope to benefit from the stock’s liquidity.
“I expect [some] investors will dribble out shares into the market and see how far they can go,” a second ECM banker said. “I’m not sure they’ll even do blocks. There’s no value in marketing. Everyone knows everything there is to know about Alibaba.”
Some investors may want to sell quickly if they think the overhang of supply is likely to persist. There should be plenty of buyers. “I don’t think it will be hard to find good-sized buyers at these levels,” the third banker said.
But most bankers do not expect a flooding of Alibaba shares on March 18.
“I don’t think a lot of people are that keen to sell, especially with the share price softening from the highs,” a third ECM banker said. “If the stock price had stayed on a one-way rally, then obviously there [would be] more incentive [to sell]...There may be more room for upside. And if you sell now, it doesn’t look good for the stock price. So if you’re not in a rush, why sell now?”
And nobody wants to be outed in the marketplace as having been an early, aggressive seller; Alibaba could make life difficult for portfolio managers it views as unfriendly, by denying them access to future deals, for example.
The sheer size of the Alibaba’s float will also cushion its price against a sell-off. “Alibaba is one of the most liquid stocks right now in the US. It shouldn’t be difficult for the market to absorb this,” the second ECM banker said. Trading volumes totalled $163.7 million on the NYSE last Friday, and average $410.6 million a day since its September flotation, according to Bloomberg.
While the 429 million shares coming unlocked have created an expiration overhang, this is nothing compared to the sell-down that could occur on September 18 when Softbank, Yahoo, Alibaba CEO Jack Ma and executive vice chairman Joe Tsai’s lock-ups expire. Some 1.58 billion shares, or 64% of the total company, will become available for sale on the public market on the anniversary of the world’s largest IPO.
The first lock-up saw only 8.11 million shares become available three months after the IPO, according to its most recent A-1 filing.
The expiration overhang comes nearly two months after Alibaba was lambasted by China’s State Administration of Industry and Commerce (SAIC) for failing to crack down on the sale of counterfeit goods on its website.
Shares fell 9% after the SAIC published the white paper, dropping from $98.45 on January 28 to $89.81 per share on January 29. Shares are now trading around $81.86 on March 16.
Alibaba called the SAIC’s January 28 statement “flawed” and “unfair”, highlighting the company’s “zero tolerance policy towards counterfeits.”
On January 30, the SAIC backtracked, saying the white paper carried no legal force, according to media reports.
