Amid intensifying e-commerce competition and a subdued economic rebound in China, Alibaba Group has taken decisive action through an accelerated share buyback programme.
The company allocated a record-breaking US$4.8 billion in the first quarter of 2024 to repurchase its shares, coinciding with multi-year lows in share prices. The move aims to bolster its stock price and instil confidence among investors in a challenging market environment.
Aligned with its commitment to delivering value, Alibaba Group recently raised US$5 billion through the issuance of seven-year convertible senior notes with a coupon rate of 0.5%. The net proceeds from this offering will be used to repurchase approximately 14.8 million of its American depositary shares, while also supporting potential future buybacks under the company's existing share repurchase programme.
This initiative further reinforces Alibaba's determination to enhance value for its shareholders.
As part of the bond issuance, Alibaba will initially offer the notes to purchasers with a conversion premium of approximately 30%. (The initial conversion price of the convertible bond is set at a premium of around 30% over the last reported sale price of US$80.80 per ADS on the New York Stock Exchange as of May 23 2024.) Additionally, the company has implemented capped call transactions alongside the bond issuance, which will be triggered if the price of Alibaba's ADS surpasses US$161.60.
By implementing capped call transactions, Alibaba will not only be able to mitigate potential share dilution, but also enhance the conversion premium of the convertible bonds from the initial 30% to approximately 100%. This adjustment, based on the last reported stock price of US$80.80 per ADS on the NYSE as of May 23 2024, allows Alibaba to provide additional value to bondholders upon conversion.
Furthermore, these measures will alleviate the risk of diluting existing shares, safeguarding the interests of existing shareholders and maintaining the overall capital structure of the company.
Convertible bonds offer a unique opportunity for both the issuer and bondholders, providing simultaneous benefits to both parties. By issuing convertible bonds with a low coupon rate of 0.5%, the issuer can raise capital at a relatively lower cost (approximately 100-200 basis points less) compared to conventional debt instruments, reducing the interest expense burden and allowing for increased allocation towards share buybacks.
Share buybacks demonstrate the issuer's commitment to supporting stock prices, potentially boosting demand and positively impacting share prices. The combination of share buybacks and convertible bonds with a low coupon rate signals confidence in the company's performance, further supporting the stock price.
Bondholders, in turn, enjoy the advantages of both upside potential and downside risk mitigation. Rising share prices provide the opportunity for "equity-like" returns through price appreciation upon conversion, while in the event of share price declines, bondholders still receive regular coupon payments and the repayment of the principal, offering a measure of downside protection.
Overall, a convertible bond acts as a win-win financial instrument, delivering advantages to both issuer and bondholders. The issuer benefits from lower financing cost and enhanced equity valuation, while bondholders gain from potential returns with a degree of protection against losses. This makes convertible bonds an attractive choice, offering a flexible and balanced approach to financing and investment. Alibaba Group's strategic move represents a significant milestone in fortifying its share repurchasing efforts, providing investors with an opportunity to participate in the company's promising growth potential.
This article is the latest edition of our Nuts & Bolts series that looks into the nitty-gritty of some of the sophisticated investment products and capital markets deals in Asia. For the previous article in this series, please click here.
