Let's get physical! Alibaba buys Intime

Jack Ma is set to spend $2.6 billion to take Intime Retail Group private, moving to boost Alibaba’s physical presence as part of its online-to-offline strategy.

Alibaba is the world’s largest online marketplace. But the company’s founder Jack Ma, no longer content with dominating e-commerce, has been making efforts to bolster the physical presence of his company.

That effort took a step forward this week when Alibaba unveiled a HK$19.8 billion ($2.6 billion) bid for Hong Kong-listed shopping mall operator Intime Retail Group.

Alibaba is following the path of US e-commerce giant Amazon, which announced plans to open 100 pop-up stores by the end of this year in an attempt to reverse the once online-only business model. Amazon believes these stores will offer a physical browsing experience to customers to complement its online sales.

But unlike Amazon, which will open the new stores itself and under its own brand, Alibaba is on a buying spree. Apart from Intime, Alibaba also owns 21% of electronics retailer Suning Commerce Group and has a 32% stake in supermarket chain Sanjiang Shopping Club.

Buying Intime will allow Alibaba to immediately expand its physical presence by taking control of the company’s 29 department stores and 17 shopping malls, mainly in tier one and tier two cities in China.

The deal could also offer Alibaba an opportunity to fully commercialise its online-to-offline (O2O) e-commerce app Miaojie, which aims to enhance the shopping experience by helping users find shops and car parks, get e-coupons and queue for restaurants.

The deal shows that traditional retailers still form an important part of the retail ecosystem, despite consumption moving online. Alibaba, the very definition of an e-commerce giant, has made a clear statement about the relevance of a physical network.

“Alibaba is working with offline retailers to transform the conventional approach, create new consumer shopping experience and use actions to embrace future opportunities under the new retail model,” Alibaba chief executive Daniel Zhang said in a statement.

“Our combination with Intime will enable us to tap into the long-term growth potential of a new form of retail in China powered by internet technology and data,” Zhang said.

Big cheque

How much Alibaba is determined to strengthen its offline presence can be seen by the big cheque it is paying for Intime. At $2.5 billion, the deal is the third biggest single acquisition by Alibaba following its $4.7 billion acquisition of online video provider Youku Tudou and its $4.6 billion investment in Suning Commerce Group.

The terms offered to existing Intime shareholders also appear generous. Alibaba, together with Intime founder Guojun Shen, is offering to buy Intime shares at HK$10, representing a premium of 42.25% over the stock’s HK$7.03 Monday close.

Intime shares were trading close to its one-year high of HK$7.29 before the announcement of the buyout offer.

On a historical price-to-earnings basis, Alibaba is buying Intime at about 16.2 times its full-year net profit of $155 million in 2015.

Alibaba is also paying a significantly higher price than when it initially bought a 9.9% stake in Intime for $219 million in 2014. At that time, Alibaba bought Intime shares at HK$7.5335 each. Alibaba's stake has since increased to 28%.

The buyout offer is made via a scheme of arrangement, which means Alibaba is required to get at least 75% acceptance from minority shareholders and less than 10% voting against the proposal at the extraordinary general meeting.

Since Intime is registered in Cayman Islands, it will also need to pass the so-called headcount test, which takes into account the number of physical shareholders voting for the proposal in addition to the total number of voting shares.

Alibaba will need to fulfill all conditions of the offer, including getting shareholder and court approvals, by the August 31 long stop date.

The transaction is the biggest take-private deal for a Hong Kong-listed company since Chinese billionare Wang Jianlin delisted Dalian Wanda Commercial Properties for $4.4 billion last year.

CICC is the sole buyside financial advisor on the transaction.

¬ Haymarket Media Limited. All rights reserved.
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