A Tale of Two Alibabas
Alibaba Group Holding Ltd. may be many things. Cash-strapped isn't one of them.
The Chinese media company, which also dabbles in e-commerce, has decided it needs another $5 billion to $7 billion. It looks like debt investors are willing to play ball, but for a price.
Jack Ma's empire has been printing money, and saw free cash flow more than double since its 2014 IPO, to $9.3 billion in the last financial year.
After a relative lull in the year ended March 31, 2016, Alibaba returned to credit markets the following year.
It's not as if this pile of money has been sitting around attracting dust: Alibaba dished out more than $10 billion of cash on acquisitions and joint ventures last year.
But even that spending spree hasn't dented its cash balance, thanks to the enormous wads of money its core business -- selling ads to (mostly Chinese) merchants plying their wares (to mostly Chinese buyers) -- has been throwing off. The result is that although debt has been rising, cash has been rising faster, making its balance sheet appear healthy.
So why don't debt investors love Alibaba?
That may be a shocking question, but let's have a look.
Alibaba is marketing tenors ranging from 5.5 years to 40 years, with guidance already doing the rounds, Bloomberg News reported Wednesday. We might expect the final pricing to be around 20 basis points to 30 basis points tighter.
Let's take the 10-year bond. With guidance at 125 to 130 basis points above Treasuries, we may see a final spread at around 105, which would have Alibaba paying among the highest costs of any equivalent bond issue of the same rating this year. 1
The nearest comparison would be BP Plc, the oil company whose balance sheet looks far worse, and chip designer Qualcomm Inc., which was embroiled in lawsuits that threatened its entire business at the time of that bond sale, well before a hostile takeover bid from Broadcom Ltd. At the other end, we're looking at 30 to 40 basis points wider than PepsiCo Ltd. and Costco Wholesale Corp., neither of which has significantly better financials than Alibaba.
With Alibaba shares up 113 percent this year, equity traders have maintained their love for the company. Debt investors, though, see something the stock folks don't, or won't.
Perhaps they've been reading Deep Throat's blog (disclosure: he tore into my latest Alibaba column), following Mark Cuban's tweets, or simply comprehend the risks behind the company's variable interest entity structure in a way that share investors are wont to ignore.
Clearly debt investors are pricing in a China discount. The question is whether equity investors ever will.
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Paul Sillitoe at email@example.com