Alibaba defends payments unit split-off

Alibaba executives have defended a controversial deal to split off its payments arm, as investors expressed their concerns about corporate governance at the Chinese internet behemoth’s fundraising roadshow.

Fund managers have questioned the 2011 transfer of Alipay to a company controlled by Alibaba founder Jack Ma at private meetings and it has come up at well-attended group lunches in Boston and New York this week, even as executives generate growing excitement over the $21bn share sale.

A knockdown price has enabled bankers to build strong interest ahead of the flotation, planned for next week.

Ownership of Alipay was transferred to a company called SFMS and replaced with a profit-sharing agreement because of unclear Chinese regulations surrounding foreign ownership of payments companies, Alibaba told investors this week.

“It was the hardest decision of my life,” Mr Ma said.

Tony Ursillo, technology analyst and portfolio manager at Loomis Sayles, said the Alipay transfer process had seemed “not totally transparent”, but executives’ answers assuaged concerns at a lunch meeting in Boston.

“At the end of the day, my bet is on management, and Jack Ma talked about Alibaba like it was his child and he was nurturing it into an adult,” Mr Ursillo said. “There are clear strengths that this company has, from a substantial market share and a trusted brand, to a very experienced management team.”

One investor who is due to meet management next week said the Alipay deal and other aspects of corporate governance topped a list of concerns. The company that shareholders will own does not have direct ownership of Alibaba’s assets and business, which operates through “variable interest entities” owned by its founders. A partnership of 30 individuals will retain the right to nominate a majority of the board after the IPO.

The Alipay switch three years ago underscored how these relationships can be shifted, the investor said. “It is worrisome, and although it sounds far-fetched, I fear coming into the office one day to discover the whole thing has unravelled.”

Other investors said they had already come to terms with Alibaba’s corporate governance and focused their time with management on grasping the scope of the business and the growth potential instead. Questions also have touched on Alibaba’s mergers and acquisitions strategy and the rapidly shifting competitive landscape in China, according to attendees.

“The roadshow has been interesting in its conservatism,” said Mark Yusko, chief investment officer at Morgan Creek Capital Management, which has invested in Alibaba in the past through private transactions and has put in for shares in the IPO. “Management has been going about it in a measured way. They are not making big overarching promises and they are sticking to the facts.”

A key question as the marketing tour moves on to the West Coast of the US and then Asia and Europe is price. The stated range of $60 to $66 gives the company a market valuation of between $148bn and $163bn versus expectations in the marketplace which had reached $200bn or beyond. Mr Yusko expects the company will price the shares above the range, but not push the utmost outer limits.