Alibaba Group Holding Ltd’s (BABA) Largest Investor Is Selling A $7.9 Billion Stake

alibabaTyler Durden:  Did SoftBank just ring the bell at the top for internet retail giants?

Shortly after the close, Japan’s SoftBank Group Corp., the largest and one of the oldest investors in Chinese e-commerce giant Alibaba, said it would sell at least $7.9 billion of its stake (with an option to sell another $1 billion) in the company to boost its cash position and pay down debt.

According to the filed press release, SoftBank has established a new vehicle called the Mandatory Exchangeable Trust, with the intention of divesting $5 billion in Alibaba’s American depository receipts in a private placement “to qualified institutional buyers.” SoftBank will also sell 2 billion in shares back to Alibaba, $400 million to members of the Alibaba Partnership and $500 million “to a major sovereign wealth fund.”

As a result of the partial liquidation, Softbank’s holdings will decline from 32% to 28%. As Bloomberg adds, the sales are part of a broader effort by the Japanese technology giant to reduce its leverage.

In the press release, SoftBank Chairman and CEO Masayoshi Son said that “this investment has been phenomenally successful and, over the past 16 years, we have built a close relationship, working together on many exciting projects,” SoftBank Chairman and Chief Executive Officer Masayoshi Son said in the statement. “In that time, we have not sold any Alibaba shares. There are huge opportunities ahead for Alibaba and SBG looks forward to the continued partnership.”

In a separate statement, Jack Ma, Alibaba’s chairman, said that “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.”

U.S. web portal Yahoo! Inc. has about a 15 percent stake in Alibaba – part of the remaining holdings it first acquired in 2005 for about $1 billion. Yahoo has been seeking a tax-efficient way to separate from the stock. Most recently it has sought to sell its core web assets in a strategic review.

BABA stock declined 2.8% in after hours trading Tuesday after the announcement; it is still up roughly 20% in 2016.

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The press release is below:

SoftBank Announces a Minimum $7.9 Billion Monetization of its Alibaba Stake in Coordination with Alibaba Group

  • Proceeds from Capital Raise to Reduce SoftBank’s Leverage
  • Consistent with the Company’s SoftBank 2.0 Disciplined Capital Structure Management Strategy
  • SoftBank to Remain Alibaba’s Largest Stockholder and Close Strategic Partner

SoftBank Group Corp. (“SBG”) today announced that it has approved a series of capital raising transactions (the “Transactions”) which involve monetizing a portion of the shares of Alibaba Group Holding Limited (“Alibaba”) held by SBG’s wholly owned subsidiary SB China Holdings Pte Ltd (“SB China”).

Specifically, the Transactions are comprised of (i) the intended sale of $2.0 billion of Alibaba ordinary shares to Alibaba, (ii) the intended sale of $400 million of Alibaba ordinary shares to members of the Alibaba Partnership acting collectively, and the sale of $500 million of Alibaba ordinary shares to a major sovereign wealth fund pursuant to an exemption from registration under the U.S. Securities Act and (iii) an intention of the Mandatory Exchangeable Trust (“Trust”), a newly formed trust, to offer, subject to market conditions and other factors, $5.0 billion aggregate purchase price of its mandatory exchangeable trust securities (“Trust Securities”) exchangeable into American depository shares (“ADSs”) of Alibaba in a private placement to qualified institutional buyers pursuant to Rule 144A under the U.S. Securities Act. The Trust expects to grant the initial purchasers of the Trust Securities an option to purchase up to an additional $1.0 billion aggregate purchase price of Trust Securities.

1. Purpose of the Transactions

Following SBG’s first investment in Alibaba in 2000, the two companies have built a close relationship through business partnerships, joint ventures, joint investments and other collaborations. SBG Group held 32.2%1 of Alibaba’s issued and outstanding shares as of March 31, 2016, and Alibaba is an equity method affiliate of SBG. SBG continues to be committed to its partnership with Alibaba, and the Transactions are driven purely by SBG’s capital structure and de-leveraging objectives.

A disciplined approach to capital structure and leverage is fundamental to our SoftBank 2.0 transformation strategy. The Transactions are expected to allow SBG to monetize a portion of its Alibaba shares in order to increase its liquidity cushion, improve SBG’s consolidated net interest-bearing debt / EBITDA ratio (excluding Sprint Corporation) from 3.8x as of March 31, 2016 to approximately 3.3×2, and enable flexible and prudent financial management. The sale of Trust Securities is expected to allow SBG to monetize its shares at a potential premium to the current share price, while eliminating downside risks as a result of owning these shares. The Trust Securities are expected to be settled upon exchange by delivery of Alibaba ADSs representing the pledged shares, which is expected to occur on the scheduled exchange date (in 3 years), and both the sale of Alibaba ordinary shares and the issuance of the Trust Securities will enhance SBG’s financial profile. SBG plans to use the proceeds of the Transactions for the repayment of interest-bearing debt as well as other general corporate purposes.

SBG would continue to hold approximately 28%3 of Alibaba’s total outstanding shares following the Transactions (excluding the ordinary shares that are expected to collateralize the Trust Securities). Alibaba will remain an equity method associate of SBG. SBG expects that its Alibaba shares will continue to be a core shareholding of SBG and it intends to maintain its strong relationship with Alibaba. SBG’s Chairman & CEO, Masayoshi Son, will remain a board director of Alibaba, and Alibaba’s Executive Chairman, Jack Ma, will remain a board director of SBG.

In connection with the Transactions, SBG will also enter into a lockup agreement with Alibaba under which it has agreed not to transfer any Alibaba shares held by it for a period of six months, subject to certain exceptions.

“When I first met Jack Ma, I knew immediately he had the vision and passion to build the world’s leading e-commerce company, and I was very happy to invest alongside him to help him realize his ambition,” said SBG Chairman and CEO Masayoshi Son. “This investment has been phenomenally successful and, over the past 16 years, we have built a close relationship, working together on many exciting projects. In that time, we have not sold any Alibaba shares. There are huge opportunities ahead for Alibaba and SBG looks forward to the continued partnership.”

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