Alibaba Group mulls acquisition of Korean online retailer 11Street

[Courtesy of 11Street]

Alibaba Group is reportedly in the process of pursuing the acquisition of 11Street Co., a South Korean e-commerce platform - a deal that could provide the Chinese e-commerce giant a stable foothold to rival local dominant players following its successful penetration into the Korean Jikgu (direct purchase from an overseas online marketplace) market via AliExpress. SK square, the largest shareholder of 11Street, is actively negotiating with Alibaba as the deadline for an exit promised by 11Street to its financial investors approaches.

According to sources on Thursday, SK square is considering selling 11Street to Alibaba. Foreign strategic investors (SI), including Q10 and Amazon, which initially showed interest in the acquisition, have reportedly stepped away from the negotiating table. Alibaba is now the sole candidate and is continuing negotiations with SK square after proposing a price, and SK square has also allowed Alibaba to conduct due diligence on 11Street.

Alibaba is a large e-commerce operator with a market capitalization of about 300 trillion won ($230 million) on the New York Stock Exchange. It recorded around 157 trillion won in revenue last year, making it the second-highest revenue earner among Chinese online retailers behind JD.com. Alibaba already dominates the Korean market, with Alibaba Group and AliExpress heading the Jikgu orders list in 2020 followed by Taobao, according to Korea Customs Service, and the companies’ combined market share topped 43 percent.

According to statistics from the Korea National Statistical Office, the online shopping transaction volume in Korea exceeded 206 trillion won last year, up over 10 percent compared to the previous year. Korean e-commerce players Coupang and Naver collectively control nearly half of the market share in this market, with Coupang holding a 21.8 percent share and Naver a 20.3 percent share in the first quarter of this year. In contrast, 11Street, which has fewer loyal customers compared to its domestic rivals, recorded a market share of around 7 percent.

Another variable in the completion of the deal is the price. 11Street was valued at around 2.7 trillion won in 2018, when it was attracting FI investments, but the estimated corporate value has since dropped to around 1 trillion won. While SK square could incur some losses if the deal is concluded at or around the industry-estimated price, there are doubts in the market as to whether Alibaba is willing to pay even 1 trillion won. But as 11Street previously promised it would list by the end of September to attract 500 billion won in investments from the National Pension Service, Central Saemaul Geumgo, and private equity fund operator H&Q Korea, there is speculation that SK square could accept a broader range of Alibaba offers.

If the requirement is not met, the FIs can demand that SK square buy back their shares at an internal rate of return (IRR) of about 8 percent from the end of 2023. They can also exercise their drag-along rights to force the majority shareholder to sell its shares together starting next month. While the FIs are reportedly not considering extending their fund maturity, there could be a possibility of reviewing the timing for the exercise of drag-along rights if negotiations between SK square and Alibaba make meaningful progress.