Chinese e-commerce operator JD.com Inc. has agreed to divest all its shares in its financial services arm JD Finance for around RMB14.3 billion (US$2.1 billion), as the Internet finance unit dismantles a legal structure for overseas listing and plans a domestic IPO instead.
At the same time, JD.com's founder Richard Liu obtained control of the Internet finance unit, which was previously majority owned by parent JD.com, as Liu is to acquire an additional 4.3% stake in JD Finance and can vote for JD.com employees via share voting arrangements.
NASDAQ-listed JD.com has agreed to sell all of its 68.6% equity stake in JD Finance as part of a spin-off for JD Finance to become an independent entity backed only by domestic investors. In exchange, JD.com will obtain RMB14.3 billion (US$2.1 billion) in cash and 40% of JD Finance's future pre-tax profit when JD Finance has a positive pre-tax income on a cumulative basis.
In addition, JD.com has reserved the right to swap the profit sharing right for a 40% stake in JD Finance at a future date, subject to regulatory approvals, according to disclosure filings as JD.com revealed its fourth quarter and full year results yesterday.
Under the agreement, Richard Liu, JD.com’s chairman and chief executive officer, will acquire an approximately 4.3% equity stake of JD Finance at the same price as third-party investors. Liu will also obtain a majority of voting rights in JD Finance as he can vote on behalf of staff and other investors through proxy arrangements on top of his own voting right.
It's unclear who are the third party investors acquiring the 68.6% interest from JD.com, or what kind of valuation is used in the deals. In January 2016, Beijing-based JD Finance raised RMB6.65 billion (US$1 billion) from investors including Sequoia Capital China, China Harvest Investments and China Taiping Insurance at RMB46.65 billion (US$7 billion) valuation post-investment.
JD Finance's larger rival, Alibaba Group Holding Ltd.'s financial services affiliate Ant Financial, was reportedly planning an initial public offering in Hong Kong this year to raise at least US$10 billion, after it raised US$4.5 billion last April at a valuation of around US$60 billion. As Ant Financial remains a private company, no specific operational details are available.
For the full year of 2016, JD Finance incurred a net cash outflow of RMB39.8 billion (US$5.7 billion) and received a net cash inflow of RMB42.3 billion (US$6.1 billion) through financing activities.
As of December 31, 2016, the ending balances of its consumer financing, business financing and supply chain financing were RMB25.3 billion (US$3.6 billion), RMB0.7 billion (US$0.1 billion) and RMB11.5 billion (US$1.7 billion), respectively, according to JD.com's consolidated financial results.
The transactions are currently expected to close in mid-2017. After that, JD Finance will be de-consolidated from JD.com’s consolidated financial statements after the deals are completed.