Alibaba is expanding to the Southeast Asia in a big way. The Chinese e-commerce behemoth announced Tuesday that it was buying a majority stake in online retailer Lazada Group for $1 billion. Lazada, founded in 2012 by Rocket Internet, claims to be the “number one” e-commerce platform in the Southeast Asia. It has a presence in six countries: Singapore, Vietnam, Thailand, the Philippines, Indonesia, and Malaysia.
Southeast Asia represents huge growth potential
The deal gives Alibaba an opportunity to tap into the region’s growth potential. According to Frost & Sullivan, the six markets where Lazada has a presence had e-commerce revenue of just $10.5 billion in 2015. Online retail accounts for just 1.5% of total retail volume in these countries. That is much lower than 8% in the US and 12% in China, representing a huge growth potential.
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Lazada’s revenue rose 81% to $190 million in the first nine months of 2015, while the number of active customers tripled to 7.3 million. Under the terms of the deal, Alibaba will buy $500 million worth of newly issued Lazada shares. Rocket Internet is selling a 9.1% stake to Alibaba for $137 million while British supermarket operator Tesco is also offloading 8.6% stake for $129 million. Kinnevik has agreed to sell a 3.8% stake for $57 million.
Alibaba looking for future growth drivers
The deal values Lazada at $1.5 billion. Though the Chinese online retailer did not specify the size of the stake purchased, share sales suggest it will hold about 66% equity in Lazada. Following the transaction, Rocket Internet will still own 8.8% stake in Lazada. Tesco will be left with 8.3% stake and Kinnevik will own 3.6% shares. The Hangzhou-based company also has the option to buy remaining shares of Lazada 12-18 months after the deal closes.
Alibaba is seeking to expand overseas as the Chinese economy cools and the company faces stiff competition from its smaller rival JD.com. It is looking for future growth drivers, and the Southeast Asia’s nascent market offers that potential. Lazada gives it access to a platform with a growing consumer base outside China, a solid foundation, and a proven management team.