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Making Sense of Alibaba’s Recent Dealings with Ant Financial

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Feb. 12 2018, Published 1:16 p.m. ET

Alibaba taking equity stake in Ant Financial

Alibaba (BABA) is deepening ties with its payments affiliate Ant Financial roughly one month after US regulators blocked an attempt by Ant Financial to acquire MoneyGram (MGI).

MoneyGram, a global money remittance provider that is battling fierce competition from Western Union (WU), agreed to sell to Ant for $1.2 billion. But the US blocked the deal on national security concerns.

The deepening of ties between Alibaba and Ant involves Alibaba modifying its relationship with Ant by taking advantage of a provision that allowed it to swap its profit share in payments for an equity stake.

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Swapping 37.5% profit share for 33% equity stake

When Alibaba split Ant into a separate company ahead of its IPO (initial public offering) in 2014, the agreement was that it would take 37.5% of Ant’s pretax profits every quarter. But Alibaba also had an option to convert its profit share in Ant for an equity stake, and that’s what it did recently, according to a regulatory filing.

Instead of taking a cut of Ant’s profits, Alibaba will now own 33% of equity interest in Ant. According to Alibaba, this new arrangement puts it in a better position to share in Ant’s long-term success.

Alibaba’s profit share from Ant Financial was $54 million in fiscal 3Q18 (December quarter).

JD has rights to 40% of JD Finance’s profits

JD.com (JD), which competes with Alibaba in China’s e-commerce industry, also separated its payments unit JD Finance into an independent entity and in doing so it retained rights to 40% of the finance unit’s future profits. JD too has an option to swap its profit share in JD Finance for an equity stake in the unit.

Notably, JD is backed by another Alibaba rival, Tencent (TCEHY), which owns WeChat app and backs Snap (SNAP).

Continue to the next part for a closer look at Ant Financial’s operations.

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