The breakup of Alibaba Breakup starts with a $12 billion cloud haul

(Bloomberg) — Alibaba Group Holding Ltd. will explore initial public offerings of its logistics and grocery arms as it scraps its $12 billion cloud business, as it begins the first phase of a long-awaited collapse to try to revive anemic revenue growth.

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CEO Daniel Zhang first outlined this historic shakeup, which begins with listing grocery arm Freshippo as early as six months from now, before proceeding to float its logistics giant Cainiao arm over the next year to 18 months. Significantly, Alibaba will fully build the country’s largest cloud services platform as a dividend to shareholders, which means it may give up control of one of its fastest growing businesses.

Zhang said that the purpose of single withdrawals is to simplify the structure and respond to market needs. He said, without elaborating, that a stand-alone platform could one day grow to overtake Alibaba if it attracted the right external funding. Analysts have argued in the past that private clouds could operate at a disadvantage to state-backed competitors, given Beijing’s increasing insistence on using government-controlled data storage and internet services.

Investors had hoped that Alibaba’s decision in March to split itself into six units might stimulate the market, enable the various operations to move more nimbly and fuel stocks. Each unit, except for the core Taobao Tmall Commerce Group, has been released for independent search for financing and listing.

However, Zhang unveiled that grand vision after the leading Chinese e-commerce company reported its third consecutive quarter of single-digit revenue growth, reinforcing concerns that the recovery in Chinese consumer spending may be further afield than expected. Domestic commerce contracted 3% in the March quarter, while its cloud computing division, the other closely watched company, fell 2% — its first decline ever. Alibaba shares fell more than 3% in New York.

This lackluster rendering highlights how China may be recovering from years of Covid Zero restrictions at a slower pace than expected, due to US sanctions and an uncertain global economic environment. Hopes that Beijing will shore up private companies this year after a crackdown on the internet sector have not yet translated into meaningful policy.

What Bloomberg Intelligence says

The first ever decline in Alibaba’s cloud revenue increases the urgency of new strategic investors to revive business growth after its eruption in the next 12 months. The drop in Alibaba’s fiscal fourth-quarter direct sales, which includes Freshippo’s revenue, also raises doubts about the grocer’s catalysts after the IPO, due in 6-12 months. Cainiao, which is prepared for listing in 12-18 months, had the lowest fourth-quarter logistics revenue growth in four years.

— Katherine Lim and Trini Tan, analysts

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As part of the overall restructuring, Alibaba plans to send about half of its investment team into six different business units that will be set up after the breakup. Historically, this team has been at the forefront of a nationwide investment wave that helped expand Alibaba’s influence and fend off competition from Inc. and Tencent Holdings Ltd.

“This transformation will enable all of our businesses to become more agile, enhance decision-making, and enable faster response to market changes,” Zhang told analysts on the conference call.

Key points of the breakup chart

  • Alibaba plans to spin off its cloud services division as a separate entity by distributing shares to shareholders over the next year

  • This means that Alibaba may eventually end up not owning shares in China’s largest cloud services platform

  • It will aim to float its Cainiao logistics arm in 12 to 18 months

  • Immediately, the company aims to complete the Freshippo grocery chain’s IPO within the next year

  • It plans to secure outside funding for its international trading division, which includes overseas operations such as Singapore-based Lazada

Alibaba reported sales of 208.2 billion yuan in the March quarter, missing analysts’ average estimate of 209.2 billion yuan. Net income came in at 23.5 billion yuan, reversing losses from last year thanks to one-off gains.

Investors bet that consumer spending and the technology sector would rebound after Beijing lifted years of sweeping restrictions that have crippled the world’s No. 2 economy. But economists point to slowing trade and other signs that the nascent recovery is running out of steam. During the recent Golden Week holiday, an important indicator of broader sentiment, public spending lagged behind booking volumes.

Despite the general malaise, there are hints that online commerce is at least rounding the corner.

Gross merchandise value growth in China’s e-commerce industry accelerated to 11% in March after slowing to 5% in the first two months of 2023, Goldman Sachs Group Inc. estimates. , which indicated a recovery in demand and an easing of logistical disruptions. Last week, JD said volume growth this quarter outpaced the previous three months, which helped support its stock.

Tencent’s revenue grew at its fastest pace since 2021, while Baidu Inc. Also sales exceed expectations. Both are attributed to the recovery in the domestic consumption sectors. Michael Perry, the money manager best known for The Big Short, has boosted his bullish bets on JD and Alibaba even as other hedge funds cool off in reopening deals in the country.

For now, Alibaba is pushing cost cuts to prop up margins and offset weak domestic growth — a sea change for a technology dealmaker that once spent aggressively to control segments of the economy. President Xi Jinping’s administration’s crackdown on online commerce has also forced Alibaba to change a business model that once followed merchant exclusivity.

“In the past few months, we have seen a gradual recovery in consumption in China, but consumer confidence and spending power still needs more momentum,” Zhang said. “At the same time, competition among multiple consumption platforms is still fierce, and everyone is trying to meet the growing demands with more value-for-money products and services.”

This primary focus takes on more urgency due to fierce competition in its home market from JD Corporation and PDD Holdings Inc. And start-ups like ByteDance Ltd. , which intensified its efforts to attract customers and attract merchants.

Abroad, the tech giant is scaling back its global ambitions. Alibaba sold its last stake in Indian fintech giant Paytm this month, accelerating its withdrawal from the world’s fastest-growing mobile and internet arena.

– With assistance from Zheping Huang, Debby Wu, Jennifer Ryan, and Peter Elstrom.

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