China and Ant Group Reach Agreement to Restructure as a Holding Company

China and Ant Group Reach Agreement to Restructure as a Holding Company

Ant Group Co. and Chinese regulators have agreed on a restructuring plan that will turn Jack Ma’s fintech giant into a financial holding company, making it subject to capital requirements similar to those for banks, Bloomberg reported.

The plan calls for putting all of Ant’s businesses into the holding company, including its technology offerings in areas such as blockchain and food delivery, people familiar with the matter said. One of Ant’s early proposals to regulators had envisioned putting only financial operations into the new structure.

An official announcement on the overhaul could come before the start of China’s Lunar New Year holiday next week, the people said, asking not to be identified discussing private information. Alibaba Group Holding Ltd., which owns about a third of Ant, erased losses in Hong Kong trading on Wednesday after Bloomberg reported the agreement. Alibaba rose 3.5% in New York.

Some market participants had been speculating Ant might be forced to spin off portions of its business, which now looks unlikely, said Shujin Chen, Hong Kong-based head of China financial research at Jefferies Financial Group Inc.

Ant’s restructuring plan marks the first big step in what’s expected to be a lengthy overhaul process, as regulators draw up detailed capital requirements and other guidelines for companies that span multiple financial business lines.

China only introduced its framework for financial holding companies in September and many of the specifics are still being ironed out. While the rules will eventually provide more regulatory clarity for Ant, they’ll almost certainly force the company to slow the torrid pace of expansion that has made it China’s dominant fintech player and one of the world’s most valuable startups.

Ant is still exploring possibilities to revive its initial public offering, which was abruptly halted by regulators in November, one person familiar with the matter said. But given the financial holding company framework is so new, it’s unclear how long it might take for authorities to sign off on a listing.

Francis Chan, a Bloomberg Intelligence analyst in Hong Kong said in December that Ant’s valuation could plunge below $153 billion as a result of the changes it will undergo as a holding company. The company was above $300 billion in November, before its IPO was halted.

As part of the overhaul plans, Ant and at least a dozen banks are paring back their years-long cooperation on consumer lending platforms that fuel the spending of at least 500 million people in China.

Ant declined to comment. The People’s Bank of China, which oversees financial holding companies, didn’t immediately respond to a faxed request for comment by Bloomberg.

Alibaba office

Ant’s restructuring is part of a broader government campaign to increase supervision of the financial and technology sectors. Regulators have in recent months targeted everything from health-care crowdfunding to consumer lending. In January, they proposed measures to curb market concentration in online payments, where Ant and Tencent Holdings Ltd. are the biggest players.

Ant made the move to restructure into a holding company as a way to calm nerves in the faceoff between the company and Chinese authorities. Under the financial holding company structure, Ant’s businesses would likely be subject to more capital restrictions, potentially limiting its ability to lend more and expand at the pace of the last few years.

The agreement means that China has succeeded in its attempt to control the online financial sector. With Ant going holdco to ensure cooperation with the Chinese regulatory authorities, more moves are expected from the government in the near future to curb other sectors of its economy with unauthorized measures of freedom.

The news of a possible solution has softened the faces of wary investors who were caught in the Chinese power play. However, it is not clear what this will mean for Ant’s valuation and IPO. Chan estimates now that the valuation could drop below $108 billion.

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