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Why Is SoftBank Selling $7.9B Shares of Alibaba Group Holding Ltd (BABA)?

Alibaba (BABA)

Alibaba Group Holding Ltd  has agreed to acquire $2 billion of its own shares from SoftBank, which is the e-commerce company’s largest shareholder. In a bid to reduce its debt, SoftBank is selling $7.9 billion of shares of the e-commerce company in a series of transactions announced Wednesday. The shares sale will cut SoftBank’s stake in the company to 28% from 32.2%.

Alibaba (BABA)

SoftBank first invested in the Chinese e-commerce giant in 2000. For the first time, the Japanese company is selling the e-commerce company’s stock in the last 16 years.

Transactions

SoftBank on Wednesday announced that it has approved a series of capital raising transactions involving monetizing a portion of the e-commerce company’s shares.

The planned sale includes $5 billion to $6 billion of stock that will be sold by private placement to institutional investors by a SoftBank-controlled trust. Morgan Stanley and Deutsche Bank will manage the sale, Reuters reported.

Other transactions include the sale of $2.0 billion in ordinary shares to Alibaba, $400 million to Alibaba Partnership, and $500 million to a major sovereign wealth fund, whose name the company did not disclose.

SoftBank said the shares sale will generate proceeds that it plans to use to increase its liquidity cushion, improve its leverage ratio and enable flexible and prudent financial management for the company.

Further, SoftBank said it will continue to maintain its strong relationship with the e-commerce company. SoftBank’s Chairman and CEO Masayoshi Son will remain a board member of Alibaba, while Alibaba’s Executive Chairman Jack Ma will remain a board director of SoftBank.

Moreover, SoftBank entered into a lockup agreement with the e-commerce company. Under the agreement, the company will not to transfer any Alibaba shares held by it for a period of six months, subject to certain exceptions.

Alibaba’s Response on Shares Sale

Alibaba Group Holding Ltd  announced that it has agreed to purchase $2 billion shares from SoftBank.

The e-commerce firm plans to use cash-on-hand to fund the transaction.

Alibaba Partnership will also ink a deal with SoftBank to purchase an additional $400 million in shares at the same price per share as the purchase by the e-commerce company.

Executive Chairman Jack Ma stated: “Under the leadership of Masayoshi Son, SoftBank has been a highly valued, long-time partner of Alibaba for more than 16 years, and we look forward to continuing our strong partnership together.”

“As SoftBank looks to strengthen its own balance sheet, Alibaba determined that it was the best use of our capital to re-invest in our own business through an efficient buyback of a large number of shares in our own company that is accretive to our stockholders,” Jack Ma added.

The Chinese e-commerce giant is under investigation by the U.S. Securities and Exchange Commission (SEC) over its accounting practices. The company disclosed in its annual filing that the SEC is probing whether the firm’s accounting practices may have broken federal securities laws. Alibaba said it had provided the agency with documents and information relating to its consolidation policies, practices, transactions, as well as operating data from Singles Day, an e-commerce holiday in China. “We are voluntarily disclosing this SEC request for information and cooperating with the SEC,” the company said.

Shares of Alibaba Group Holding Ltd  were up 1.16% in after-hours trading. The stock has dropped by 8.2% during the past 12 months.

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