Alibaba to buy Kaola unit from China’s NetEase for $2 billion

Alibaba, China’s biggest e-commerce company, has agreed to buy Kaola e-commerce unit from Chinese company NetEase for $2 billion, adding a platform that specialises in supplying curated luxury goods from abroad to domestic consumers.

Alibaba Group, which is looking for new revenue drivers as the e-commerce market at home matures, will also invest $700 million for a minority stake in NetEase’s music streaming unit as it takes on Chinese market leader Tencent Music.

The long-rumoured Kaola deal and the music investment highlight at once a defensive move to keep niche growth players out of the hands of e-commerce rivals such as Pinduoduo and Alibaba’s flexibility in adopting new strategies.

Kaola, launched by NetEase in 2015, aggressively targets shoppers in China by offering products from top brands such as Gucci, Shisheido and Burberry, primarily sourcing goods directly from suppliers to resell to consumers.

Its more curated product line up based on popularity ensures it a loyal consumer base of shoppers, whereas Alibaba’s Tmall allows a larger range of overseas brands to launch and manage virtual storefronts on its platform, said Ker Zheng, who tracks China’s online retail sector at consultancy Azoya.

“Kaola does not have to share user time or basket space with cheaper, non-imported products,” said Zheng.

Kaola and Yanxuan, another NetEase-run line of private-label, company-branded goods, accounted for nearly half the gaming company’s revenue in the June quarter. NetEase does not break down sales from Kaola.

The Kaola deal will boost Alibaba’s access to wealthy Chinese buyers, who account for more than a third of the luxury goods sector’s worldwide revenues, as online sales slow at home.

Online retail sales in China grew 17.8% in the first half of 2019, versus 32.4% a year earlier, government data shows.

The acquisition will also help the tech giant face rising competition from rivals such as Pinduoduo.

In response to competition from Pinduoduo, that offers group-buying deals on household goods, Alibaba has already revamped Juhuasuan, its group-buying service.

It also launched Taobao Xinxuan, a line of private-label, house-brand goods.

“Pinduoduo has a will to move towards international brands or cross-border e-commerce, so in the future they would definitely want Kaola. For Alibaba, they’d want to prevent this,” said Liu Yiming, who tracks China’s e-commerce sector at the research division of 36kr.

The investment in NetEase Cloud Music, along with private-equity firm Yunfeng - which is backed by the tech giant’s founder Jack Ma, is also a way for Alibaba and NetEase to ally against a common rival - Tencent Holdings.

Tencent Music dominates the Chinese music streaming market with an 83.8% share through three streaming services, according to Quest Mobile and Macquarie Research, but it recently reported the slowest increase in a key growth metric.

It is under investigation by China’s antitrust authority in a review that could end exclusive licensing deals it forged with the world’s biggest record labels, Bloomberg has reported.

NetEase Music and Alibaba’s Xiami have 10.3% and 2.1% market share, respectively.

Meanwhile, Alibaba Group has delayed its up to $15 billion listing in Hong Kong amid growing political unrest in the Asian financial hub, two people with knowledge of the matter told Reuters.

Alibaba’s Hong Kong-listing plans are being closely watched by the financial community for indications on the business environment in the Chinese-controlled territory and provides a window into Beijing’s reading of the situation.

While no new timetable has been formally set, Alibaba could potentially launch the deal as early as October, still seeking to raise $10 billion-$15 billion, depending on whether political tensions had eased and market conditions became more favourable, one of the people said.

The decision to postpone the deal, initially set to launch in late August, was taken at a board meeting before Alibaba’s earnings release last week, the second person said.

The delay was due to the lack of financial and political stability in Hong Kong, the people added, following more than 11 weeks of frequently violent pro-democracy demonstrations which have plunged the city into turmoil.

Police have fired over 1,000 rounds of tear gas while more than 700 people have been arrested, followed by an unprecedented airport shutdown last week. Hong Kong’s benchmark Hang Seng index fell to seven-month lows last week.

“It would be very unwise to launch the deal now or anytime soon,” the first person said. “It would certainly annoy Beijing by offering Hong Kong such a big gift given what’s going on in the city,” the source added.

Reuters