A short analysis on the acquisition of South China Morning Post by Alibaba that I wrote a few days ago (before the announcement).
Alibaba, the sprawling Internet conglomerate, has been in talks to acquire South China Morning Post Group Ltd. (SCMP) according to several news outlets, who cites unnamed sources. Alibaba is well-known for its Chinese E-commerce businesses but has been expanding to other sectors, for example social media and traditional retail. SCMP has, as other legacy newspapers, been faced with falling revenues and profitability. The question is how well Alibaba can manage this decade-old organization and how to leverage its ecosystem with media assets. For those that have relied on SCMP’s apparent objectivity when it comes to reporting on China and the region Jack Ma’s connections with the authorities in Beijing is also of importance. The editorial team of SCMP can expect close scrutiny if the deal goes through.
The strategy of Alibaba has been to build an ecosystem by buying different business and setting up partnerships across verticals. Social media in China is dominated by Weibo, a microblogging service, which Alibaba holds a 15 % direct stake in. Other media assets include China Business Network, a financial data publication. This deal was done in order to expand the financial arm of Alibaba, Ant Financial. Besides expanding across Internet verticals the group has also been taking steps towards more traditional industries. In August 2015 an investment in Sunning, a Chinese electronics chain, was announced. This will let Alibaba expanding its retail activities to bricks-and-mortar stores. It is not immediately clear how SCMP fits into Alibaba’s overall strategy, but it could be a step towards further internationalization of the group. We have already seen Aliyun, the cloud business that competes with for example Amazon Web Services, set up its headquarters in Singapore for its international expansion.
One reason why SCMP has been seen as a trophy, despite its falling profitability, is its independent editorial team in a region that is becoming more and more dominated by the agenda set in Beijing. Will this status change with Alibaba as the owner, because of the connections that the company has with the authorities in Beijing? Jack Ma is in many ways a free-market enthusiast; for example, he recently told President Barack Obama that the most important thing the government can do for growing businesses is to reduce or even eliminate taxes. He is however successful at playing the role of a modern Chinese businessman that knows how to toe the party line. He often throws around buzzwords such as “reform” and “new normal”, whilst insisting that his companies gives opportunities to many Chinese to improve their lives. Alibaba’s expansion in to rural E-commerce also coincides with the Government’s strategy to increase the economic activity in those areas. If Alibaba takes control of SCMP it is unclear how the authorities in Beijing would influence the operations of the newspaper. Robert Kuok, the Malaysian Billionaire who owns Kerry Media that holds approximately 70 % of shares in SCMP, has said that a decision to sell would be a pure business decision. His conglomerate has substantial business in the Mainland however, and SCMP’s critique of the regime in Beijing has been seen as weighing down other businesses in China.
Robert Kuok through Kerry Media bought a 35 % stake in SCMP during 1993 and acquired News Corp’s remaining 15 % share the following year. The group has been extremely profitable historically and recorded a profit margin of 38 % in 2011. This has however come down to 14 % in 2014, from 23 % in 2013. The group reported turnover of 161.8 million USD in 2014, a YoY growth of 8.4 %. The company states the overall market volatility and the narrowed IPO pipeline in China and Hong Kong as reasons why spending on advertisement was down in the first half of 2015. For the first six months of 2015 revenue for Newspaper and Magazine Publishing decreased by 8 and 13 % respectively. The digital strategy of the newspaper seems to be paying off however. Pageviews grew by 20 % and digital revenue increased by 50 % over the same period. The re-designed and updated scmp.com played a big part in this according to the company’s interim report. SCMP Group owns the distribution rights to Cosmopolitan and other magazines in Hong Kong, and features an advertising and marketing unit as well as a major ownership stake in the Bangkok Post. It is unclear which parts of the Group would be included in the potential deal. The stock, which is listed on the Hong Kong stock exchange, has been suspended from trading since February 2013, something that has frustrated the other big shareholder in the company, Silchester International. The investment company hold approximately 21 % in SCMP through various vehicles.
For Alibaba and Jack Ma taking over SCMP would be a bold statement that signals the group’s ability to go global. The conglomerate has also been expanding across verticals, but it is unclear how SCMP would be leveraged in the ecosystem. For the newspaper a new owner might be able to push its digital efforts further and secure its future. An announcement is expected before Christmas.
Otto Jacobsson 