Negotiations between DCP Capital and Alibaba Group [NYSE: BABA; HKEX: 9988] for the potential purchase of the e-commerce giant’s 70% stake in Sun Art Retail [HKG: 6808] have been in limbo following the soaring stock price of Sun Art, according to a source familiar with the situation.

Sun Art Retail’s share price has surged 22.2% over five consecutive trading days since 22 November. The stock closed at HKD 2.59 per share on Friday (29 November), valuing the company at HKD 24.7bn (USD 3.2bn).

Amid the rapidly rising stock price of the ‘RT-Mart’ operator, another potential buyer, Hillhouse Capital, which has not completely withdrawn from consideration, may now need to adopt a wait-and-see approach, said a second source familiar with the situation.

A third source stated that no strict timeline has been set yet for the potential bidding of Sun Art Retail.

Ruentex Group, and KKR [NYSE:KKR] were previously reported to be among the interested bidders for Sun Art Retail, according to a 17 October local media report.

According to a stock exchange filing by Sun Art Retail on November 28, the board is considering recommending an interim dividend declaration and payment to the company’s shareholders, pending board approval.

This newswire’s Flash analysis published on 7 November sees a deal being done a good bit above HKD 2.2 per share, based on precedent EV/EBITDA multiples.

Year-to-date, Sun Art’s share price has increased by 87%, while the Hang Seng Index gained 13%.

Alibaba invested over HKD 50bn (USD 6bn) in Sun Art, buying at HKD 6.5 p/s in 2017 and HKD 8.1 p/s in 2020. CICC acted as Alibaba’s advisor in those investments, as announced at that time.

On 15 October, Sun Art announced that it had received a possible pre-conditional voluntary offer from an unnamed bidder to privatize the company. The company subsequently made an update on 14 November that its discussions on the potential offer were ongoing with no certainty of outcome or binding agreement, and no firm decision to proceed or not.

Acquisition loan

DCP Capital has been in discussions with financing banks, including China Merchants Bank (CMB), for a roughly USD 1.5bn loan financing to back its potential bid, according to two sources with knowledge of the matter. The private equity firm is also in talks with JPMorgan and Shanghai Pudong Development Bank for a potential loan commitment, one of the sources said.

Lenders are still in the process of seeking internal approvals and have yet to secure the clearance to commit to the jumbo acquisition loan, according to the two sources.

Some of the lenders may receive internal approval as soon as within the next two weeks, contingent upon the progression of the negotiations on the transaction, said one of the two sources.

“It’s not easy for a single Chinese bank to solely underwrite such a sizable loan for a retail target in China at this time,” said a fifth source. This source said that their bank is adopting a wait-and-see approach for the loan, and they will try to accommodate accordingly if other banks step up to lead the financing for DCP Capital.

Other Chinese and Taiwanese banks are also adopting a wait-and-see approach as they are cautious about solely underwriting a large loan for Sun Art, according to the fifth, sixth, and seventh sources.

They cite the volatility of retail assets in the current subdued macro environment in China.

Sun Art operates 472 hypermarkets under the brand “RT-Mart”, 32 superstores, and three membership stores branded “M-Club”. It is trading at a multiple of 6.6x EV/TTM EBITDA, well below the 18.7x level of its peer Yonghui Superstores [SSE:601933].

Sun Art announced the interim financial results for the six months ended 30 September 2024 on 12 November, stating that it recorded CNY 34.7bn revenue, down 3% YoY, and CNY 186m profit, up 149.2% YoY, a significant turnaround in this period.

DCP declined to comment. Alibaba, China Merchants Bank, Hillhouse, JPMorgan and Shanghai Pudong Development Bank didn’t immediately respond to requests for comment.