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Alibaba Buying Out China's Sun Art Retail for $3.6B

By Ivan Chung, Justin Leung, Thomas Fujimoto (HKUST), Alexander Bergmüller, Huang Haozhe, Friedrich von Storch (IE BUSINESS SCHOOL)


Overview of the deal

Acquirer: Alibaba Group Holding Ltd

Target: Sun Art Retail Group Ltd

Implied Equity Value: $3.6 billion

Announced Date: October 18th, 2020

Acquirer Advisor: CICC

On October 18th, Alibaba Group Holding Ltd announced that it is investing approximately $3.6 billion to acquire a controlling stake in Sun Art Retail Group Ltd, the China-based hypermarket operator. Alibaba, which already held a 21% stake in Sun Art pre-transaction, will attain an additional 51% equity interest through the purchase of a 70.94% share in A-RT Retail Holdings from France-based Auchan Retail International. Post-transaction, Alibaba’s stake will amount to 72%.

The deal is in line with Alibaba’s “New Retail” strategy of creating a seamlessly integrated shopping experience that blurs the boundaries between online and offline commerce. As part of the strategy, Alibaba will allow offline retail customers to pay with the same digital payment methods that are also available online and enable shoppers to view relevant product information by scanning QR codes. Also, customers can use the physical retail stores as pickup points for online orders.

After the transaction, all of Sun Art’s 484 Chinese physical retail stores will be integrated into Alibaba’s Tmall and Taoxianda supermarket platforms, as well as other key businesses across the Alibaba ecosystem, including the food delivery app and the logistics business Cainiao. As a result, Alibaba can ensure fast deliveries and an extensive product offering while collecting actionable customer insights that can be used to advance its business operations and supply chain.

“As the COVID-19 pandemic is accelerating the digitalization of consumer lifestyles and enterprise operations, this commitment to Sun Art serves to strengthen our New Retail vision and serve more consumers with a fully integrated experience” - Daniel Zhang, Chairman and Chief Executive Officer of Alibaba Group

Company Details: Acquirer – Alibaba Group Holding Ltd

Alibaba Group Holding Limited, through its subsidiaries, provides online and mobile commerce businesses in the People's Republic of China and internationally. It operates through four segments: Core Commerce, Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives and Others. The company operates Taobao Marketplace, a mobile commerce destination; Tmall, a third-party online and mobile commerce platform for brands and retailers; Alibaba Health Internet platforms for pharmaceutical and healthcare products; Alimama, a monetization platform; and, which are online wholesale marketplaces; AliExpress, a retail marketplace; Lazada, an e-commerce platform; and Tmall Global, an import e-commerce platform. It also operates Lingshoutong (a digital sourcing platform), Cainiao Network (a logistic services platform), (a delivery and local services platform), Koubei (a restaurant and local services guide platform), and Fliggy (an online travel platform). In addition, the company offers pay-for-performance and display marketing services; and Taobao Ad Network and Exchange, a real-time bidding online marketing exchange. Further, it provides elastic computing, database, storage, virtualization network, large-scale computing, security, management and application, big data analytics, and Internet of Things and other services for enterprises; payment and escrow services; and movies, television series, variety shows, animations, and other video content.

Founded in 1999, headquartered in Hangzhou, China

CEO and Chairman: Yong Zhang

Number of employees: 122.400

Market Cap: $ 706.325 billion (as of 20/11/2020)

EV: $682.191 billion (20 Nov 2020)

LTM Revenue: $89,061.2mn

LTM EBITDA: $21,628.5mn

LTM EV/Revenue: 7.66x


Company Details: Target - Sun Art Retail

Sun Art Retail is a leading retailer which operates hypermarket and fast-growing e-commerce businesses in China. Sun Art Retail operates its hypermarket business under the “Auchan” and “RT-Mart” brand. As of 31 December 2019, Sun Art Retail had a total of 486 outlets in China covering 232 cities across 29 provinces, autonomous regions and municipalities.

Founded in 1998, headquartered in Shanghai, China

CEO: Peter HUANG, Ming-Tuan

Number of employees: 146,683 (As of 31 December, 2019)

Market Cap: $10.07 billion (20 Nov 2020)

EV: $9.039 billion (19 Nov 2020)

LTM Revenue: $14,921.4mn

LTM EBITDA: $1189.4mn

LTM EV/Revenue: 0.67x


Projections and Assumptions

Short-term consequences

We expect the deal can create both revenue and cost synergies in the short term. On the revenue side, Alibaba will be able to benefit by incorporating Sun Art in its comprehensive ecosystem. Alibaba’s supermarket, online e-commerce, logistics and food delivery platforms would be able to cross-sell Sun Art’s products. Currently, all of Sun Art’s 484 physical retail stores are integrated into Alibaba’s online groceries platforms - Taoxianda and Tmall supermarket, providing online shoppers one-hour and half-day groceries delivery service. In addition to ecosystem integration, this strategy also allows Alibaba to expand the selling channel and coverage on potential clients. Alibaba’s on-demand food delivery app and logistics businesses, and Cainiao, are also looking to utilize this acquisition to offer consumers greater product selection and access. This acquisition effectively increases the sales channels for Sun Art stores, while also enhancing the customer experience of Alibaba platforms’ users. The operation of offline stores also expands the customer base into smaller local communities and older age groups, which boost Alibaba’s revenue and profit.

The deal can also be viewed as a move for Alibaba to achieve cost synergies. Given the fact that Alibaba will soon own Freshippo and Sun Art, it is unlikely to see a substantial change in Sun Art’s operations after the acquisition, as the former focuses on premium fresh produce while the latter is targeting the majority grocery purchase demand. However, by merging Sun Art’s supply chain network with those of Alibaba’s existing subsidiaries, it is highly likely that the full integration from sourcing to logistics will aid Alibaba in gaining greater bargaining power over its suppliers. Given the severe competition in the Mainland market, especially with being the head competitor to Alibaba’s online e-commerce business, putting itself into a position enjoying cost far lower than its competitors is crucial for future business sustainability. The chained effect brought by digitizing brick-and-mortar stores, which Alibaba is leading, amplifies cost synergies.

Long-term Upsides

In the long term, we see this acquisition as a big move done by Alibaba under “new retail” and “consumption upgrade” in China. The acquisition is more than Alibaba’s plan to dominate the online grocery market. Alibaba aims to realize its vision of ”new retail” by blurring the line between online and offline commerce. This could be achieved through extending the online purchase experience to offline -- turning physical stores into pickup points for online orders -- as well as integrating supply chains and enabling shoppers to use the same digital payment methods on its e-commerce platforms and in brick-and-mortar stores. Apart from o2o, we believe Alibaba will continue to digitize their offline stores after the acquisition by increasing the usage of QR-codes and mobile apps to give customers a more interactive experience during online shopping, as well as leveraging the offline stores as a testing point for some top-searching products on e-commerce platforms. On top of that, it is also a way for Alibaba to conduct penetration into third and fourth-tier cities in China. Currently, 76% of Sun Art’s stores are situated in these lower-tier cities, which Alibaba has less focus on. Comparatively, Pinduoduo Inc. has a strong presence in these less profitable but considerably growing markets, which has increased barriers to entry for Alibaba. The post-acquisition role of Sun Art can be a stepping-stone for Alibaba to expand its reach to these less-focused markets, as Sun Art has been continuously investing into domestic mini-stores and community-based sites.

Risks and Uncertainties

e-commerce companies have competed to partner with physical stores in recent years. In 2018, Walmart China (438 stores) cooperated with and launched several flagship stores to strengthen its e-commerce business. It also launched the strategy of interoperability between stores, users, and inventory, cooperated with e-grocer Dada JD Daojia to solve the "last mile" of retail, and jointly launched the first integrated Walmart Cloud Warehouse for retail superstore distribution. In 2019, Sunning acquired Carrefour China, with a network of 234 stores, covering 22 provinces, continuing to accelerate the expansion of its brick-mortar portfolio. Furthermore, another high-growth business segment that has seen fierce competition is in the fresh food e-commerce space. This year in July, Meituan launched Meituan Youxuan, a group-buying grocery platform that allows a group of people living close to each other to order products together and picks them up in person the next day. It announced the expansion of the service to 1,000 cities across 20 provinces in three months. Pinduoduo (no.2 Chinese online marketplace) also recently launched its community group-buying project, Duoduo Maicai with attractive price offerings. Other rivals include Bunny Maicai backed by Tencent, MissFresh backed by Goldman Sachs, and Didi´s Chengxin Youxuan. All of these mean that Alibaba and Sun Art Retail Group need to compete in a red ocean space despite potential rewarding growth.

The full integration of sourcing, logistics and operational systems will give Alibaba improved bargaining power and the ability to cut costs at a scale that its closest competitors can hardly catch up with” - Morningstar analyst RJ Hottovy Jr.


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