Alibaba Breaks Old Ground With Move for Department Store Chain

 | Jan 11, 2017 | 8:00 AM EST
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Alibaba (BABA) was once known as an eBay knockoff. Despite renewed concern about knockoff products appearing on its online sales platform, the company has evolved to become one of the most dynamic in Asia.

Its latest step takes the company in an unusual direction: Alibaba, via its investment unit, has offered HK$19.8 billion ($2.6 billion) for a majority stake in Intime Retail Group (INTIY) , which operates in the very physical world of Chinese department stores.

Alibaba first invested in Intime Retail in 2014, spending $692 million for a minority stake. It is now seeking to take the Hong Kong-listed Intime private in conjunction with its founder and chairman, Shen Guojun. Its latest bid would drive its holding from 28% to around 74% of the company.

This move into the real world may seem like a step backwards. But Alibaba founder Jack Ma, a former English teacher, has shown too much savvy in the past to doubt his latest step. He has driven Alibaba to become the world's largest online retailer, and the second-biggest company in Asia by market capitalization, behind only Tencent Holdings (TCEHY) .

The goal is clearly to build an online-to-offline (and offline-to-online, if you like) universe linking Intime's 29 department stores and 17 shopping malls, mainly found in China's biggest cities.

Shoppers can use Alibaba's e-wallet to buy goods in Intime's stores. People buying goods on Alibaba's high-end site, Tmall, can order products online and collect them at Intime's stores.

According to Alibaba's CEO, Daniel Yang, China's retail sector is worth $4.5 trillion per year and growing at 10.7% annually. That's far ahead of the nation's overall growth rate of around 6.5%.

The company believes it will "disrupt" conventional retailers with its multifaceted approach to shopping. The approach clearly also brings customers even farther into the Alibaba fold if they begin using Alibaba software for physical purchases, mimicking the move of Action Alerts PLUS charity portfolio holding Apple (AAPL) towards its Apple Pay system.

Alibaba is acting while Intime is at a disadvantage. The store chain reported a 21% decline in profits at its interim filing last year, compared with the same period the year before, blaming online sales for the decline. Still, its profits of HK$561 million ($72 million) come in at very healthy profit margin of 16.7% over sales of around 3 billion yuan ($430 million).

The offer is of HK$10 per share, a 42% premium over its closing price of HK$7.03 at the end of December, when trading was suspended. Its shares were trading at HK$9.62 on Wednesday afternoon after announcement of the offer.

Alibaba already owns a 20% share of the electronics and white-goods retailer Suning Commerce Group SZ:002024, shelling out $4.6 billion for that stake in August 2015. It also has a joint venture with Haier Electronics (HRELY) , a company that makes home appliances such as air conditioners and microwaves, which appear in Suning's 1,600 stores.

Ma isn't beyond a little bit of luxury shopping himself. He has purchased three Bordeaux vineyards -- Chateau Guerry, Chateau Perenne and Chateau de Sours, new additions to the 100 or so vineyards owned by Chinese tycoons.

Ma has been one of the first businessmen to come calling to president-elect Donald Trump. In a headline-grabbing move, he said he would bring one million U.S. small businesses onto its online platforms in the next five years to sell to consumers in China and Southeast Asia.

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