Chinese Authorities Approve Business Restructuring Plan
Expansion of Conversion Scope to Technology Companies
Subject to People's Bank of China Supervision
Negative Impact on IPOs and Dilution of Corporate Value
[Asia Economy Beijing=Special Correspondent Cho Young-shin, Reporter Cho Yoo-jin] Ant Group, the fintech affiliate of China's Alibaba, is transitioning into a financial holding company. Accordingly, Ant Group will be required to meet bank-level capital requirements and will be subject to supervision and regulation by Chinese financial authorities.
According to foreign media including Bloomberg on the 3rd (local time), Ant Group, whose largest shareholder is Alibaba founder Jack Ma, submitted a business restructuring plan including the transition to a holding company to Chinese financial authorities and has recently received approval from the authorities.
The restructuring plan includes a requirement to convert into a full holding company encompassing all technology business sectors, including blockchain and food delivery. Previously, Ant Group proposed including only the financial sector under the holding company, but the scope has now been expanded.
Financial holding companies must be supervised and regulated by the People's Bank of China, the country's central bank. There are many restrictions such as capital increases. Because of this, Ant Group initially planned to make one of its subsidiaries a financial holding company and convert the parent company, Ant Group, into a technology company.
With Alibaba deciding to convert Ant Group into a financial holding company, it has begun capital expansion. Alibaba Group holds a 33% stake in Ant Group.
Alibaba plans to issue a 40-year maturity senior unsecured bond denominated in US dollars worth $5 billion (approximately 5.5 trillion KRW) within this week. Although the interest rate and other bond issuance conditions have not been finalized, if successful, it will be the largest dollar-denominated bond issued by a Chinese company.
Credit rating agency Moody's rated the bond Alibaba is pursuing as investment grade ‘A1’. Major foreign media analyzed that the funds raised from this bond issuance will be used for operating capital and that the bond issuance is unrelated to Alibaba's financial condition.
The funds obtained through the bond issuance are expected to be used to increase the capital of Ant Group as a financial holding company. Chinese financial authorities have demanded that Ant Group raise its reserve requirement ratio from the existing 5% to 30%.
However, due to Ant Group's transition to a holding company and bond issuance (increased debt), its corporate value is expected to decline, potentially negatively impacting its future initial public offering (IPO). Francis Chan, a Bloomberg Intelligence analyst, analyzed that "Ant Group's corporate value could drop from $280 billion before the IPO suspension to $108 billion."
China's government strengthening of antitrust regulations is also expected to further dilute Ant Group's corporate value. The People's Bank of China recently released a draft of the ‘Non-bank Payment Institutions Regulation’ stating that if a market share exceeds 50% in the online and mobile economy market, it will be subject to antitrust investigations.
In the electronic payment market, if a single entity's market share exceeds 50% or if two entities' combined market share exceeds two-thirds (66.6%), they become subject to antitrust investigations.
If three entities' combined market share exceeds three-quarters (75%), they are also subject to investigation. If deemed a monopoly, the company may be split. As of the end of June last year, Alipay (Zhifubao), operated by Ant Group, held a market share of 55.4%.
It remains uncertain when Ant Group's IPO, which was suspended last November, will resume. On the 26th, Yi Gang, Governor of the People's Bank of China, stated at the ‘2021 Davos Agenda Virtual Meeting’ hosted by the World Economic Forum (WEF) that "If Ant Group follows normal legal procedures, it can achieve good results."
However, foreign media predict that due to significant uncertainties related to the resumption of Ant Group's IPO and the transition to a holding company, it will take time before the IPO is relaunched. Bloomberg and other foreign media reported that the agreement between Chinese financial authorities and Ant Group is expected to be officially announced before the Lunar New Year holiday.
Meanwhile, following the news of Ant Group's transition to a financial holding company, Alibaba's stock price on the New York Stock Exchange closed at $263.43, up 3.51% from the previous day.
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