Alibaba Group Holding Ltd recently held talks with bankers to discuss the possibility of obtaining a $4 billion loan for expansion, which it appears to have put into good use. The company made its first major foray into the Southeast Asian e-commerce sector by pumping a total of around $1 billion into Lazada, a Singapore-headquartered e-commerce company with presence in Southeast Asia.
The deal makes Alibaba the company’s controlling shareholder. It involves a $500m purchase of newly-issued equity shares, besides the acquisition of existing shares held by Lazada stockholders.
Pushes Value to $1.5 Billion
The deal has pushed the valuation of Lazada, which was founded by Rocket Internet in 2011, to $1.5 billion.
Lazada’s shareholders who sold their shares to Alibaba include Tesco, Kinnevik and Rocket Internet. Rocket Internet sold a 9.1 percent shareholding for $137 million, while Tesco accepted $129 million to offload its 8.6 percent stake. Kinnevik sold its 3.8 percent share for $57 million.
The transaction means the three firms now own nearly half of Lazada shares as they used to. Rocket now owns a 8.8 percent stake, while Tesco has a 8.3 percent stake and Kinnevik retained a 3.6 percent shareholding.
Rocket Internet built Lazada to scale the e-commerce markets in major Southeast Asian countries such as the Philippines, Indonesia, Singapore, Malaysia, Vietnam and Thailand. While China and India have largely dominated most of the investments in Asia ex-Japan due to their sizeable population and relatively bigger economies.
However, Southeast Asia is one of the biggest potential markets in the world for ecommerce businesses.
Lazada has recorded strong revenue growth momentum in the region, though it has suffered huge operational losses as it strives to register profits. It has rapidly expanded its footprint in Southeast Asia, which has a population of about 600 million people. Smartphone sales and Internet coverage in the region have increased in recent years, looping in first-time online shoppers.
Lazada has sought to cater to local preferences by selling items such as Muslim clothing, such as hijabs for women.
The company is competing with MatahariMall and Tokopedia, with the latter supported by Sequoia and SoftBank.
With Alibaba’s vast financial muscle, Lazada now has a larger war chest. It will also benefit from the Chinese e-commerce platform’s other ventures in Southeast Asia such as logistics firm SingPost.
Southeast Asia lacks adequate warehouse facilities, IT management and good infrastructure, making it challenging to deliver items purchased online.
Alibaba Expands Aggressively into International Markets
For Alibaba, India and Southeast Asia are its immediate priority global markets are it seeks to venture out of its Chinese home turf. However, it may opt to focus on its Southeast Asian companies if India continues to record poor economic performance.
The deal follows Alibaba’s recent acquisition of $266 million (2.06 billion Hong Kong dollars) to purchase a Hong Kong newspaper publisher South China Morning Post.
Alibaba also entered a $500 million joint venture with SoftBank Group Co. and Foxconn Technology Group to purchase Indian e-commerce firm Snapdeal. In 2014, It also spent $249 million to acquire a minority stake SingPost, Singapore’s leading postal firm as it seeks to establish a global e-commerce business.
Alibaba and other Chinese firms are currently on an expansion spree as they seek to cash into growing international markets and create a cushion against the slow economic growth back home. The companies have spent $92.3 billion this year to purchase foreign firms in various industries such as agriculture and semiconductors, compared with $106.7 billion in last year alone.
Before the Lazada acquisition, Alibaba had a free cashflow of $3.7 billion, meaning it still has a room for more acquisitions. Analysts are keenly watching its next move, hoping it acquires another promising startup.