Alibaba Looks to Migrate to Brick-and-Mortar with Intime Deal

Alibaba Emerges the forerunner in $2.6 billion bid to privatize department store chain

a1Chinese ecommerce giant Alibaba Group Holding Limited (NYSE: BABA) has emerged as the forerunner in a $2.6 billion bid to privatize department store chain Intime Retail Group Co. Ltd, as reported by Bloomberg on January 10th, 2017. The potential deal comes at a time when Alibaba is seeking to deepen its integration with traditional brick-and-mortar stores while its online sales growth has begun to signs of slowing down. Gaining a controlling stake in the Hong Kong-listed Intime will also allow the ecommerce giant to explore ways to digitize the $4.5-trillion Chinese brick-and-mortar retail industry that has not adapted well to the growing popularity of online shopping.

Alibaba Investment Ltd, the investment arm of Alibaba Group, and Intime founder Shen Guojun have offered HK$10 ($1.29) per Intime share in a deal that will require as much as HK$19.8 billion ($2.55 billion) including stock options. The offer price is a 42% premium over Intime’s previous close of HK$7.03 when trading stopped on December 28th, 2016, pending an announcement. Intime’s stock surged as much as 38% when trading resumed on Tuesday, January 10th, 2016, its highest price since July 2015.

Alibaba, which would own almost 75% stake in Intime, is paying a huge premium for a company that reported a decline in revenue since the second half of 2015. The offer values Intime at about 18.7 times EBITDA of 1.39 billion yuan ($201 million) for the 12 months ended June 2016, according to Bloomberg calculations. In 2015, Alibaba invested $4.6 billion in electronics retailer Suning Commerce Group Co. Ltd, after which Alibaba emerged as China’s largest ecommerce retailer with its Taobao and Tmall platforms. Earlier in 2014, Alibaba invested $692.25 million in Intime and now owns 27.82% stake, with Shen holding 9.17%. The duo now plans to buy the remaining stake in Intime using internal cash resources and external debt financing. After taking the company private, Alibaba and Shen planned to explore development opportunities and implement a series of long-term growth strategies for Intime.

China’s retail sector witnessing a slowdown

Alibaba’s potential deal with Intime assumes significance given that the Chinese government is working on a broader internet sector strategy that aims at combining online and offline industries, encouraging technology-driven, high-value economic output to help spur growth at a time when the world’s second-largest economy is witnessing an economic slowdown. The economic slowdown in China, Alibaba focus market, is beginning to affect transaction volumes on Alibaba’s online shopping platforms, where sales growth has decelerated in recent quarters, prompting the e-commerce firm to expand into other areas such as online video and local services.

Departmental stores have struggled to cope in recent years as lackluster, poorly managed shopping malls are increasingly making way to online bazaars. Unlike in the US, which is dominated by a clutch of mega-chains, the Chinese retail experience is far more fragmented and inconsistent.

Intime, one of the better-known players operated and managed just 29 department stores and 17 shopping malls in China as of end-June 2016, mainly in eastern Zhejiang province but also in Anhui and Beijing, according to the Company’s semi-annual report. Shenzhen-based Maoye International Holdings Ltd and Hong Kong-based Lifestyle International Holdings Ltd, which operate the upscale Jiuguang chain in China, both issued profit warnings for H1 FY16.

Intime could provide Alibaba physical presence

Intime, which mainly operates in first- and second-tier cities, reported that its profit fell 21.3% in H1 FY16 mainly because online stores had transformed the competitive retail landscape. Alibaba’s potential deal with Intime could allow it to establish a physical presence or act as collection points for online shoppers. In turn, department stores could use Alibaba’s data on popular clothes or colors to choose brands or styles. Through its presence in departmental stores, Alibaba sees an opportunity in helping Chinese retailers use technology to transform inventory management, while securing a physical network through which it can get goods to customers more efficiently and faster.

The privatization of Intime is Alibaba’s first deal for 2017, building on a string of acquisitions in recent years. It announced 35 deals over the past 12 months with a total value of $15.2 billion, according to data compiled by Bloomberg. Among its targets were a number of physical retail chains, including Suning Commerce Group Co. and Haier Electronics Group.a2

Alibaba diversifies to films distribution

Apart from retail and technology investments, Alibaba has also diversified into film distribution and marketing over the past few months. In October 2016, Alibaba Group’s Alibaba Pictures Group Ltd. purchased a stake in Amblin Partners LLC, an American content-creation company co-founded by Steven Spielberg, to work together on production, marketing and distribution of Hollywood movies both globally and in China, as reported by Bloomberg. a3Alibaba Pictures is a Hong Kong-based investment holding company that focuses on presenting media-related goods and services, with the Alibaba Group being its largest shareholder.

The deal will help China’s film industry make inroads into Hollywood at a time when Chinese filmmakers have met with resistance in the West because of limited control over the dissemination of their movies in the country owing to government quotas on foreign films. Simultaneously, China is trying to expand its reach globally and is predicted to become the biggest box-office in the world soon.

Stock Performance

a4Alibaba’s stock stood at $96.94, inching up 0.20%, at the close on Wednesday, January 11th, 2016, having vacillated between an intraday high of $97.45 and a low of $95.60 during the session. The stock’s trading volume was at 8,706,713 for the day. The Company’s market cap was at $241.05 billion as of Wednesday’s close.

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