Alibaba Issues Record $4.5 Billion Convertibles To Fund Buybacks | Old North State Wealth News
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Alibaba Issues Record $4.5 Billion Convertibles to Fund Buybacks



(Bloomberg) — Alibaba Group Holding Ltd. sold $4.5 billion worth of convertible bonds, a record dollar-denominated sale by an Asian company, securing capital needed to buy back shares and invest in businesses including artificial intelligence.

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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.”

Read more: Alibaba’s $25 Billion Buyback Fails to Assuage Investors

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 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’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.

–With assistance from Charlotte Yang, Jeanny Yu, Ken Wang, Edwin Chan and Xi Wang.

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