Alibaba Sells Loan Arm to Alipay Parent in Pre-IPO Change

Alibaba Group Holding Ltd. is selling its small-business lending arm to the company that already controls payments affiliate Alipay, separating itself from the last of its major financial units ahead of an initial public offering expected next month.

The Chinese e-commerce giant will sell the loan business to Small and Micro Financial Services Co. for $518 million in cash and annual fees for seven years, it said in a U.S. regulatory filing yesterday.

Small and Micro Financial Services already owns Alipay, a PayPal-like service that is used by shoppers on Alibaba’s websites. The agreement also lifts a $6 billion cap, under certain conditions, on funds that Alibaba could receive if Alipay or its parent company go public, the filing shows.

The sale means the financial-services assets will be owned by Chinese nationals instead of the global investors that may buy shares in the IPO. It also takes financial and regulatory risk relating to the operations off of Alibaba’s balance sheet, while increasing the pool of profits the company can generate from them, the filing shows.

Alibaba will now receive 37.5 percent of pretax income from Small and Micro Financial, compared with the 49.9 percent it was receiving from just Alipay before, according to the filing. Alibaba could acquire as much as a 33 percent stake in Small and Micro Financial Services if given Chinese regulatory approval, the filing shows. If Alibaba does buy a stake, the profit-sharing and IPO-payment terms from yesterday’s filing will be amended again.

Alipay Critical

More than 78 percent of purchases made on Alibaba’s platforms last year were processed through Alipay, according to the prospectus. The lending unit provides financing for small-and medium-sized businesses that were selling products on Alibaba’s marketplaces. Other units within the Small and Micro Financial group include consumer finance, asset management, financial-products distribution and insurance.

Alibaba sold Alipay to Small and Micro Financial -- which is controlled by co-founder Jack Ma -- in 2011 amid concern that it wouldn’t be permitted to conduct business in China while it has foreign ownership, the IPO filing shows. That sale drew criticism from shareholder Yahoo! Inc., which said it wasn’t informed of the sale at the time.

In a statement, Yahoo said the terms outlined in yesterday’s filing were negotiated on a collaborative basis and that it supports the agreement.

SoftBank Corp., the Japanese wireless carrier led by Masayoshi Son that owns more than 30 percent of Alibaba, said the deal was negotiated on a collaborate basis.

“We support this restructuring and believe it is beneficial to all parties,” Tokyo-based SoftBank spokeswoman Mariko Osada said by phone.

Alibaba is planning an IPO for September, people familiar with the matter said last month. The offering could be the largest ever in the U.S., estimates of Alibaba’s valuation suggest.

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