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Ant Group’s Restructuring Could Slash Its Valuation And Slow Its Growth

Chinese giant Ant Group’s plan to put its online financial businesses into a holding company to satisfy regulators could slash the firm’s valuation, require billions of dollars in reserves and force Ant to retain big shares of loans it currently sells off.

“Its growth would slow a lot,” Francis Chan, Bloomberg Intelligence analyst said.

China’s central bank told the media Tuesday (Dec. 29) that Ant is drafting plans to put its lucrative securities, insurance, consumer lending and other financial businesses into a holding company that would comply with the nation’s banking regulations. Ant had previously avoided those rules by arguing that it’s not a bank, but a technology company that works with banks to facilitate financial services.

However, regulators cooled to that argument last month, when they slammed the brakes on Ant’s planned $37 billion initial public offering after billionaire Jack Ma, who helped found both Ant and Alibaba, publicly criticized China’s banking system.

He told a business conference in October that Chinese banks suffered from a “pawnshop mentality” that hurts lending and expansion.

“Mortgages and guarantees are for a pawnshop, but if we go to extremes in relying solely on collateral assets, certain enterprises will pledge all of their assets, and the pressure [for them] is enormous,” Ma said.

The criticism triggered a firestorm of pushback from Chinese regulators, who quickly summoned Ma and other Ant executives to a closed-door meeting just days before the company planned to stage what would have been history’s largest initial public offering. The Shanghai Stock Exchange then canceled the IPO, which would have valued Ant at about $315 billion.

Beyond offending Chinese officials who aren’t used to dissent, Ma’s comments put a focus on Ant at a time when questions are emerging about whether it and other FinTechs’ business models are creating systemic risk. After all, Ant has operated outside of traditional banking rules while generating large amounts of consumer loans that could leave the Chinese economy heavily leveraged.

Banking authorities held a second meeting with Ant this past weekend and announced on Tuesday (Dec. 29) that the company would set up a regulated holding company for its banking activity.

Reuters cited an unnamed source as saying that will include Ant’s wealth management and insurance distribution businesses as well as its minority stake in an online lender called MYbank. However, the news service said it wasn’t yet clear whether the move would also include Ant’s Alipay mobile and online payments platform, the company’s second-biggest revenue generator after consumer lending. Reuters said Ant declined to comment.

Meanwhile, Bloomberg reported that Ant is planning to leave its services that link users with food deliveries, on-demand neighborhood services and hotel bookings out of the holding company.

Ant’s financial businesses have served as conduits for such things as small loans to consumers, working with a network of banks that actually hold most of the debt. However, putting those operations into a regulated holding company means that Ant will likely have to comply with banking rules that require such things as co-funding 30 percent of loans.

Bloomberg’s Chan estimated that Ant would need at least 70 billion yuan ($11 billion) of capital to meet the co-funding requirement. Presumably, co-funding that big a portion of debt would also slow Ant’s loan growth down from recent strong levels.

Chan calculated complying with banking rules would drive the valuation of Ant’s consumer lending, wealth management and other non-payment businesses down by as much as 75 percent.

All told, he thinks Ant’s total valuation could drop below the $153 billion it stood at some two years ago following a fundraising round. That’s roughly half of the value that analysts expected the firm to reach following the IPO.

Experts Foresaw Such Actions

Howard Yu, LEGO professor of management and innovation and director of IMD’s signature program, Advanced Management Program (AMP), last month predicted Chinese regulators would force Ant to restructure.

“Any FinTech disruptor, when it becomes so big, represents systemic risk,” he told PYMNTS CEO Karen Webster in an interview.

About the only upside that market watchers see for Ant is that at least regulators aren’t forcing the company to break up and completely spin off its lucrative, fast-growing financial businesses.

“This means China is still trying to encourage domestic consumption, and they need platforms like Ant to help with consumer loans,” analyst Wang Zhen of UOB-Kay Hian Holdings told Bloomberg. “The key is that consumer lending shouldn’t be over-leveraged.”

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