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Alibaba Strikes Deal to Boost Windfall From Potential Alipay IPO

Under one scenario, Alibaba would regain a direct stake in China's largest digital payments business.

Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.

Alibaba Group, the monstrous Chinese Internet company, has inked a deal that gives it more options for profiting from the future success of China’s Alipay payments company, according to a regulatory filing.

Under one scenario that still needs Chinese government approval, Alibaba can acquire a 33 percent stake in Alipay’s parent company, Small and Micro Financial Services Company.

In the event that the government does not approve a stake or Alibaba chooses not to acquire one, Alibaba will be due a minimum $9.375 billion payout if Alipay or its parent company go public, according to the filing. Under a previous agreement, the IPO payout due Alibaba would have fallen somewhere between $2 billion and $6 billion, but no higher.

“[T]he arrangements are structured with the aim of securing long-term economic participation in Small and Micro Financial Services Company, which we believe is in the best interests of our company and all of our shareholders,” Alibaba said in the filing. “The potential for long-term economic participation can come in the form of either a perpetual 37.5 percent profit share stream or a possible future direct equity interest.”

The reason for the financial arrangements between Alibaba and Alipay is tied to the complicated past between the two entities. Alibaba first created the Alipay digital payments service a decade ago to help build trust in its online marketplace. In 2011, it spun Alipay out into a separate business controlled by Alibaba Chairman Jack Ma so that it would comply with new Chinese government regulations.

Alibaba shareholders were unhappy with losing an important piece of Alibaba’s business. To appease investors, the e-commerce giant entered into commercial agreements with Alipay’s new parent company to recapture some of the lost value from the split. This new arrangement is meant to provide a bigger economic upside to Alibaba and its shareholders, including Yahoo and SoftBank.

Alibaba is also selling its small business lending division to Alipay’s parent company for $518 million.

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