With its first foray into the troubled world of newspapers and magazines, Alibaba got a good deal. If it can get the South China Morning Post read around the world, on mobile, the company's acquisition of the only major English-language newspaper in China free of official censorship could turn out to be an even smarter bet.
Alibaba bought the Hong Kong company's media assets, including the 112-year-old South China Morning Post newspaper, for HK$2.06 billion ($266 million) -- about 1.8 times revenue. Axel Springer in September paid $343 million, or six times projected revenue, for most of the online financial-news site Business Insider, while the $1.32 billion purchase of the Financial Times by Japan's Nikkei, in July, was for 2.5 times revenue.
Only the $250 million purchase of the Washington Post by Amazon founder and CEO Jeff Bezos was a better deal by that measure: a 60 percent discount to revenue at the iconic but unprofitable U.S. newspaper. In profit terms, he paid more -- 17 times Ebitda, against 10 times for the SCMP.
Alibaba is hoping to weather the storm hitting the SCMP and its peers by making the content free to broaden readership. The Chinese company promised to bulk up the newspaper's offerings in digital, and especially mobile, while expanding the staff after a spate of departures. At the same time, Alibaba says it doesn't want to sacrifice editorial freedom.
There's no doubting the scale of the SCMP's challenges.
Profit has been declining for the last three years at the group, with a $2.7 million loss at the newspaper offset by an operating profit of $32 million at the magazines in the first half. Circulation has been flat.
But China's biggest e-commerce company, flush with cash from its $25 billion New York IPO last year, probably can pull this off.
Alibaba's foray into newspapers marks a rare move into an asset with overseas potential, rather than one to feed its growing Chinese customer base. This year alone, Alibaba spent more than $10 billion for all or part of companies including a bricks-and-mortar rival, the electronics retailer Suning Commerce Corp.; the handset maker Meizu; and the video site Youku Tudou.
The SCMP purchase, as Alibaba Vice Chairman Joe Tsai said in a letter to shareholders, gives "readers around the English-speaking world, from New York to London to its home in Hong Kong," a way to better understand the world's second-largest economy. Or put another way, Alibaba needs to reassure its foreign shareholders -- Yahoo, Softbank of Japan and U.S. institutions -- and the many luxury brands that sell products on its sites, that there's still room to grow as China's economy slows.
If Alibaba is right about demand for news on China, the SCMP could even be a money-maker. Alibaba has already succeeded in exploiting online advertising in ways that most media firms can only dream of. Its Taobao platform, which connects buyers and sellers of everything from bicycles to handbags, was free when it was launched in 2003. Four years later, after building up a critical mass, Alibaba monetized the site by keeping Taobao free while allowing sellers to pitch for prime advertising space.
While Alibaba doesn't break down how much Taobao generates for the firm, surging advertising on the back of growing traffic has been one of the company's biggest sources of profit growth. In September 2013, Alibaba got 4 percent of online-retailing revenue from mobile. By September 2015, the share was 61 percent.
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