Poor diagnosis

Hong Kong finds Alibaba dealmaking in poor health

Alibaba's dealmaking in Hong Kong is in poor health. The city's regulators say that the e-commerce group broke takeover rules when it first invested in a health care firm in 2014. Details are scarce and Alibaba does not have to compensate shareholders. Yet this latest run-in is another reason for investors to be wary of the company's dealmaking.

Hong Kong's Securities and Futures Commission (SFC) has reprimanded the $198-billion giant over its initial investment in Hong Kong-listed CITIC 21CN, now known as Ali Health, which gave the e-commerce group a 38 per cent stake. Alibaba took control of the unit a year later in a deal worth $2.5 billion. Now, the regulator has ruled that Alibaba's first transaction offered favourable terms to only some shareholders, a "clear breach" of the city's takeover code.

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The specific details of the violation are not yet clear. And despite the breach the SFC concluded that Alibaba was still exempt from having to launch a general offer to all investors, mainly because Ali Health's shares have performed strongly since the takeover. Alibaba is also considering an appeal. Nevertheless shares in the $5.9-billion health business fell six per cent on the news.

Of course, this isn't the first time the New York-listed Alibaba has clashed with Hong Kong's powerful regulators. A dispute over the company's governance structure - a partnership that effectively grants control to a handful of executives and co-founders - prompted Alibaba to shift its planned initial public offering from Hong Kong to New York in 2014.

Local investors still recall chairman Jack Ma's 2010 decision to shift Alibaba's payments unit - a business now valued at around $60 billion - into a vehicle he controls. More recently, Alibaba has continued to invest in Hong Kong, snapping up a newspaper, an lottery firm and a movie production company in the former British colony.

The Ali Health ruling gives outsiders another reason to be cautious when dealing with Alibaba.