The Chinese e-commerce pioneer priced the notes due 2031
with a coupon of 0.5% and a conversion premium of 30%. Orders for the bonds
were multiple times oversubscribed, with demand from investors globally, a
person familiar with the matter said, asking not to be identified because the
information is private.
Alibaba is taking advantage of cheap financing costs as well
as a sharp rally in its shares to raise money, analysts said. The firm needs
funds to invest in its core businesses and the cloud, both of which have bled
market share during a crackdown on the sector by Chinese authorities and
subsequent internal turmoil. At the same time, the sale signals its view that
the stock is severely undervalued.
Part of the proceeds from the offering will be used to
repurchase 14.8 million of its American depositary receipts at the time the
deal is priced, as well as to fund future buybacks, Alibaba said in a
statement.
“The move is an opportunity to obtain cash offshore on
favorable terms, at a 0.5% rate,” said John Choi, an analyst at Daiwa Capital
Markets Hong Kong Ltd. “This way they can start executing a share buyback right
away, which the company can say is more beneficial to shareholders as the
buyback will be more than the dilution.”
Convertible bonds allow companies to borrow funds at lower
rates than regular market borrowings, though such offerings can hurt the
issuer’s stock price because of the possibility that the debt will be changed
into shares. However, with the recent surge in Alibaba’s ADRs, the negative
effects on the share price from dilution may be less of an issue for investors,
analysts said.
The offering by Alibaba Is the biggest dollar-denominated
equity-linked debt issuance by an Asian company on record, according to data
compiled by Bloomberg. It eclipses an issuance of $2.9 billion in five-year
notes by Singapore’s Sea Ltd. In September 2021, the data show.
Locking In
Shares of Chinese tech firms have been rallying since
February, as the government signaled more support for the industry while cheap
valuations lured investors. Alibaba’s sale takes place after rival online
retailer online retailer JD.com Inc. earlier in the week sold a total of $2
billion of convertible bonds due in five years.
Tech companies are trying “to lock in offshore US dollars to
maintain the flexibility in doing share buybacks while investing overseas,”
said Gary Tan, a portfolio manager at Allspring Intrinsic Emerging Markets
Equity. “We are somewhat disappointed by the low conversion premium which could
suggest that Alibaba’s transformation to resume growth is taking longer than
expected.”
Hangzhou-based Alibaba’s newly installed leaders have
signaled to the market for months that they view their company as severely
undervalued — and in some cases, putting their money where their mouths are.
Co-founder Jack Ma and his longtime lieutenant Joe Tsai — who returned to take
the helm as Chairman in September — bought Alibaba stock for the first time in
years at the start of 2024.
Its ADRs surged almost 29% in the month to May 17. The stock
has come under pressure this week after the company led the way in cutting
prices on some cloud and artificial intelligence services, spurring concerns
about a price war in China’s nascent AI market.
The ADRs closed down 2.3% at $80.80 on Thursday. Alibaba’s
Hong Kong-listed shares were down 0.6% in afternoon trading on Friday.
The company is seeking to strike a balance between returning
cash and investing in existing and new businesses, including in artificial
intelligence, Tsai and Chief Executive Officer Eddie Wu said in a letter to
shareholders on Thursday.
What Bloomberg Intelligence says:
Alibaba’s convertible bonds offering may increase scrutiny
of changes to its plans for a primary listing in Hong Kong by the end of August
and the timeline for achieving a double-digit return on invested capital. The
company’s intention to use the bonds’ proceeds for share purchases was more
targeted than JD.com’s. — analysts Catherine Lim and Trini Tan.
Tsai and Wu are reinvesting in Alibaba’s core commerce
business now, even as it tries to claw back its share of the cloud services
market from state-backed rivals such as as China Telecom Corp. That’s
particularly critical as the company tries to stake its claim on the booming AI
arena — a market where no one company can claim to have an unassailable lead.
Just this week, the company announced it was setting up in
Mexico for the first time, while unveiling a plan to build at least six
datacenters in key markets including Malaysia, Thailand, Philippines, South
Korea over the next three years.
Alibaba’s convertible bonds were marketed at an annual
coupon of 0.25% to 0.75%, and at a 30% to 35% conversion premium, according to
terms of the deal reviewed by Bloomberg News earlier.
The offering — which the company said included a so-called
greenshoe option that may increase the deal size by $500 million — adds to an
already busy month for convertible bond issuance. Globally, there have been
$10.2 billion worth of such deals this month, dwarfing April’s $4 billion
tally, after a pause for the earnings season interrupted a string of
$10-billion plus months, according to data compiled by Bloomberg.
Alibaba’s offering is expected to close on May 29, the
company said. Holders of the convertible bonds can ask it to buyback all or
part of their notes on June 1, 2029.
Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley,
Barclays Plc and HSBC Holdings Plc helped arrange the deal, according to terms
seen earlier by Bloomberg News.
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