CASE : FINANCING ALIBABA’S BUYOUT –

SYNDICATED LOAN IN ASIA

Submitted By:

(Section-A/Group-9)

G20007 – Anirudh Singh

G20008 – Anshul Borkar

G20024 – Mohit Kumar Keshri

G20040 – Shubham Bhargava

1. Case Background

Alibaba had emerged as the world’s largest online business-to-business trading platform that
allowed smaller buyers to buy at goods at wholesale prices. Alibaba earned revenue higher
than Amazon and eBay combined in 2012. With few tangible assets, for a Chinese
technology, its 2012 syndicated loan was the first sizable loan. It was stated in the creative
loan covenants that 100 percent of the distributable profit would be repatriated by the
subsidiaries for debt service. The loan was partially to be used for buyback of Yahoo!’s stake
in Alibaba. It was mentioned in the agreement done in the year 2012 that Yahoo! would sell
half of its stake back to Alibaba immediately for $7.1 billion and, in the next few years, an
additional 10 per cent would be sold during next Alibaba’s IPO and the remainder would be
divested sometime after that. Now, in order to pay off the $4 billion in loans that it received
in 2012, Alibaba thinks it is right time to tap the debt market and hence to finish the
payments to Yahoo! That it owed for the stock repurchase.

2. Critical Financial Problems

i) Sparring Partner
Although Alibaba became a premier internet player in China due to Yahoo!’s investment,
there was frequent sparring between Alibaba and Yahoo!. For instance, Alibaba
considered that Yahoo!’s Hong Kong site was encroaching on its turf by seeking
advertising revenues in Mainland China. Similarly, Yahoo! protested that Alibaba did not
consult it before deciding to spin off Alipay to a company owned by Jack Ma.

ii) Financing Stock buyback

Yahoo! had acquired 40% stake in Alibaba and Yahoo!’s advertising revenue was
continuously declining and was captured by Google and Facebook. After several failed
attempts by Alibaba to buyback its stock, finally it succeeded in signing an agreement to
buyback half of Yahoo!’s stock for $7.1 billion. The main issue was of getting financed
this stock buyback. Alibaba had to come up with ways to get the billions of dollars at
reasonable price.

iii) Market Flex Language

U.S. and European arrangers had incorporated a Market Flex provision, which allowed
them to change the pricing of a loan based on investor need and to shift amounts between
various tranches of a loan, which is not fair-minded for the borrowers.

iv) The challenge to Alibaba's market leadership due to Leveraged buyout

Ma once said that Alibaba, which doesn't currently own delivery infrastructure, will
invest up to $4.5 billion to ramp up its logistics. Similar Operation challenges will always
exist. Hence, Debt proceeds could have rather been used to meet its operational needs
rather than leveraged buyout where the buyer uses debt to acquire equity in the firm from
another owner.

v) Syndicate Loans comes with covenants

 The loan agreement that Alibaba opted for did not require any tangible assets to be used
as a collateral. In return, Alibaba had to reassure that the lenders would have access to its
net profit of 2011 which was $500 million.

The covenants of the syndicate loan were as described under:-

• The minimum consolidated interest ratio of Alibaba Group must be 4

• The consolidated debt to equity ratio must not exceed 1

• Total Debt to Equity ratio for the offshore group must not exceed 3.

• The combined debt service charge ratio must stay above 1.5

This Loans covenants restricts the ability of the firm to reach out for new loans for
fuelling its growth or making it less flexible to compete with those competitors which
uses predatory marketing strategy.

3. Analysis and interpretations:

Goldman Sachs and Alibaba Inc. signed a syndicated term loan agreement in May 2013, in
which Goldman Sachs was an authorized lead arranger as well as a book-runner, and Alibaba
Inc. acted as a borrower. Other participative banks included JP Morgan, Morgan Stanley and
Credit Suisse. The reasons on which Alibaba has agreed to enter into a syndicated term loan
agreement with investment banks to buyout Yahoo Inc. are mentioned below:

i) Alibaba ‘s Loan Requirement and the reason :

Alibaba required a loan of $8 billion which it has promised to pay back to

Goldman Sachs after getting the desired value. The reason for agreeing on a
syndicated loan by Alibaba is that as the syndicated loan was much less expensive
and more efficient in the thriving Chinese market that would cause elimination of
the individual risks on both sides. Furthermore, since the Chinese unit of Yahoo
which was invested in Alibaba was already generating more significant revenues
than Alibaba’s subsidiaries in China, so Alibaba decides to buyout Yahoo to
capture a larger market share as it was already an established online platform.
ii) Why not go for Public Debt?

The public debt must have required a large amount of collateral from Alibaba.
Since Alibaba had only a few tangible assets, it could not have satisfied the basic
needs for a public debt which at the same time would be quite expensive for
Alibaba. On the other hand, investment banks involved had full information
regarding Alibaba’s credit history, and they, therefore, set a reasonable bps rate
for which Alibaba went for a syndicated loan.

iii) Why not go for IPO directly?

Alibaba wants to first associate itself with an already established online platform
by buying it out rather than issuing IPO which at the time did not seem a feasible
option to opt as the public was losing interests in investing in Alibaba in the form
of stocks. There also were some fraud allegations regarding the Chinese market
(businessinsider.com), so Alibaba decided to go with the syndicated loan to
buyout Yahoo first and then issue IPO.

iv) Types of Loans and Maturities:

Tranches Maturity Type of Loan

$3.5 billion 5 years Term loan
$1.5 billion 2 years Term loan
$1.5 billion 2 years Term loan
$1.5 billion 2 years Term loan

Alibaba agreed with Goldman Sachs on four tranches and justified it that in 2012
it borrowed a dual-tranche loan of $4 billion so in 2013 based on this justification
it seems practical that the loan amount of $8 billion should be divided into four
tranches with fixed repayments. Maturities are short term and not revolving
because in 2013 Alibaba’s position had become relatively stable for which it
decided it can payback in a fixed repayment method.
 v) Alibaba’s Securities:

Absence of tangible assets in the case of Alibaba is not a much of issue as MLAB
has agreed with Alibaba based on the past successful credit history of Alibaba.
Alibaba does not have any conventional securities; however, it can provide the
revenues generated from its subsidiaries as collateral to these banks or can give a
whole of its subsidiary as collateral. Moreover, Alibaba’s profit can also be used
as a guarantee. But banks did not require a guarantee and took indication from
Alibaba’s history based on some titles Alibaba got as “best-syndicated loan of the
year (2012)”.

vi) How will Alibaba convince Investment backs without any ratings?

Since Alibaba is not a rated company, it will have to convince the investment
banks on his syndicated loan on the basis of the thriving 40% Yahoo’s stake in
Alibaba, the best titles and awards that Alibaba has achieved (credit history) and
the overall success growth of syndicated loans in the Asian market.

vii) Spread:

The agreement is done on 350 bps as the loan needs to be less expensive than
2012 syndicated loan. Moreover, based on this rate, Alibaba will provide more
extensive collateral to banks in the form of revenues generated from subsidiaries
and profits. The spread rate will be dependent on legal, environmental factors,
borrowing risk and importance of institutional investors in the financial market.

4. Recommendation:

The significant reduction of the proportion of debt in total asset would on one
hand lower the leverage ratio and decrease the financial risk, while on the
other hand, equity finance would weaken the control of founders on this
firm. But, due to the dual-class structure of shares, the dilution of the control will
be negligibly impacted by IPO.
So, Alibaba’s finance team should go for $8 billion dual-tranche syndicated loan with a
cross between a corporate-style loan with as few covenants as possible and a leveraged
buyout (LBO).