Alibaba can afford to spend up to US$38b on deals next year: BNP Paribas

Alibaba's headquarters in Hangzhou, China.
Alibaba's headquarters in Hangzhou, China. PHOTO: BLOOMBERG

TAIPEI (Bloomberg) - Alibaba Group Holding can spend as much as US$38 billion on deals next year to take on Tencent Holdings and Baidu in China's increasingly competitive Internet market, according to analysts at BNP Paribas.

Based on cash, potential free cash flow and the ability to take on more debt, Alibaba's capacity for acquisitions and investments surpasses Tencent's US$35 billion and Baidu's US$15 billion, analysts led by Vey-Sern Ling wrote in a report Thursday (Dec 10).

The triumvirate known as BAT has been involved in more than US$30 billion of acquisitions announced this year, as they expand into so-called online-to-offline services such as delivery services and physical retailing, according to data compiled by Bloomberg.

The trio could pursue more deals next year, driving an industry consolidation that's already seen taxi-hailing and online travel services merge, Hong Kong-based Ling wrote.

"Consolidation favours the strong," he said in a 40-page outlook on China's Internet industry co-written with Liulingzi Cheng and Alen Lin.

"The merged entities benefit from reduced competition, while BAT get to further their strategic goals and still benefit from a broadened ecosystem."

Tencent, the maker of the WeChat and QQ messaging apps, is ahead in deals this year, taking part in 37 completed or pending acquisitions totaling US$16.3 billion, according to data compiled by Bloomberg.

Alibaba is close behind, with 27 deals that total US$15 billion, while Baidu trails at 15 acquisitions for US$878 million.

All three are rated "buy", the analysts said. BNP cites Tencent as its top pick, citing further growth in online games driven by mobile adoption coupled with advertising sales.

Alibaba is likely to experience slowing growth in gross merchandise value, or the amount of transactions across its e-commerce platforms, as online shopping matures, Ling wrote.

Baidu, which operates the country's most popular search engine, may also see its core business plateau as mobile traffic growth tapers off, he said.

Alibaba declined to comment on the BNP report while Tencent didn't immediately respond to an e-mailed request for comment.

Baidu doesn't earmark a budget for deals, which can be done with both cash and equity, Baidu investor relations official Sharon Ng said in an e-mail.

"We need to see strong strategic rationale," she said.