China clips Ant Group’s wings

Authorities in China have continued to crank up the pressure on Jack Ma and his online empire, having announced an investigation into possible monopolistic practices at Alibaba the authorities have now ordered Ant Group to scale back its activities.

PBOC Deputy Governor Pan Gongsheng said: “ Ant’s corporate governance was not sound” and ordered it to “ return to its origins” as a payment services provider, warning that Ant had to “strictly rectify illegal credit, insurance and wealth management financial activities”.

It seems Ant Group has little choice but to comply, with the company issuing a statement in which it said it would form a rectification working group and would fully implement the requirements demanded by the regulators.

The activities that the central bank wants Ant Group to withdraw from are among the fastest growing and most profitable parts of the financial conglomerate and that creates an issue not only for Jack Ma but also for fund managers and venture cap firms that have backed Ant Group. These include Carlyle, Temasek and GIC those funds were looking forward to realising a handsome profit on their investment with the planned IPO of Ant Group.

However, that was cancelled by Chinese authorities just days before going live in early November as regulators met with Jack Ma and took him to task.

An Ant Group IPO now seems unlikely at least in its current form and without the faster growing and profitable divisions of the business its valuation would be reduced significantly. The payments processing part of the business is a low margin and potentially loss-making division on its own.
The attraction for investors was to be found in the cross-selling opportunities that the large customer base within the payments division provided to the rest of the group.

It’s thought that Jack Ma had tried to avert a formal break up of Ant Group by offering the Chinese authorities parts of the financial conglomerate but those proposals seem to have fallen on deaf ears. What the status of the overseas investors in Ant Group will be going forward remains unclear though they will surely have to significantly write down their investments.

China’s state pension fund is also believed to have bought a 5% stake in the business back in 2015 when Ant Group was valued at $45.0 billion, by 2018 the company’s valuation had risen to $150.0 billion. A valuation balloon that must be deflating rapidly.

The sharp change in Ant Group’s fortunes is reminiscent of what happened to WeWork as it tried to IPO at a sky-high valuation. Investors had no appetite for the collaborative workspace group and once their confidence was lost the IPO was shelved, forcing lead investor SoftBank to take control of the business and write off the majority of its value.

It may be that Ant Group will be allowed to sell off the businesses that PBOC wants it to withdraw from rather than just winding them down. Might it be allowed to package them together into a separate entity which it could sell to a competitor or list independently?

That would likely take time and a certain amount of patience, however, on the part of the Chinese authorities, something that may not be forthcoming.