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Alibaba is raising $5bn from issuing convertible bonds, calling into question the Chinese ecommerce group’s ability to tap its huge cash piles to repurchase shares.
The Hangzhou-based company on Friday said it was issuing $4.5bn of notes convertible into stock at $105.04 per share and due in 2031, with a 0.5 per cent coupon. The issuance includes a $500mn overallotment, which a person familiar with the matter said would be exercised.
The group said it would use the raised cash primarily to buy back shares at the current price of $80.80, fund future share repurchases, and enter into transactions to offset some of the dilution should its share price reach the convertible price.
The complex financing deal comes as Alibaba aims to continue its large share buybacks while embarking on a steep investment programme to continue its push into generative artificial intelligence.
“Over the next decade, no industry will be spared the disruption brought about by AI,” chair Joe Tsai and chief executive Eddie Wu wrote in a letter to shareholders on Thursday, noting that AI would “change and accelerate” their business.
“If we don’t keep up with the constant and marvellous improvements that AI is showing us on a daily basis, we will be displaced,” they warned.
They said developing large language models would require significant investment, and only be viable for large, profitable tech companies such as Alibaba.
Noting that Alibaba over the past two decades had “unfortunately, acquired ‘large company’ characteristics”, they pledged to be more entrepreneurial in future.
The executives pledged to balance continued share buybacks with investing for the future. They said $12.5bn had been spent repurchasing shares, cutting total share count by 5 per cent, during the year to March 31, while they had also paid a $2.5bn dividend to shareholders.
But analysts said Alibaba’s move to issue convertible debt had perplexed some investors.
“Basically they are issuing equity at a high price in the future to immediately buy back their shares at a cheaper price,” said John Choi of Daiwa Capital Markets. “On the one hand, investors understand it, on the other hand, it’s unsettling.”
A securities researcher added that the market perceived Alibaba to be issuing equity at the end of the day, which was behind the near 8-per cent stock price decline in recent days.
“Alibaba has a tonne of USD on their balance sheet, but they seem to see their investors as an ATM,” the researcher said, asking not to be named. Alibaba reported holding 30bn in dollars and 381bn in renminbi ($52.6bn) on its balance sheet at March 31.
“The bigger implication here is the billions of dollars of cash Chinese companies have on their balance sheet may not be as easily accessible as you would think,” they added.
Analysts said Alibaba was probably financing the share repurchases because of the difficulty of getting cash out of mainland China, a perennial challenge for Chinese and foreign groups.
The difficulties could be greater at present as the People’s Bank of China battles to forestall downward pressure on the renminbi.
Alibaba’s chief financial officer Toby Xu said in February that the company had a “certain percentage” of cash sitting offshore, but that the amount of the buybacks would also be affected by its ability to move its generated cash offshore.
A person familiar with the convertible debt deal said it was overall a cheaper way to raise dollars offshore than issuing a straight bond.
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