Vipshop Eyes Big M&A With New Mega Fund-Raising

| About: Vipshop Holdings (VIPS)

I don't usually like to toot my own horn, but my prediction last month that we could soon see a major fund-raising exercise by high-flying e-commerce firm Vipshop (NYSE: VIPS) has come to pass, with word that the firm is preparing to sell stock and bonds worth more than $600 million. Investors weren't extremely excited about the plan, with Vipshares falling slightly after the announcement came out. But considering that the company's shares have risen about 8-fold over the last year alone, the reception wasn't all that bad either.

From the strategic perspective, this new massive fund raising hints that Vipshop wants to take advantage of the recent wave of M&A sweeping China's e-commerce space, and I expect we could see some big deal announcements later this year.

While I did predict this fund-raising exercise (previous post), I'll admit that even I was surprised by its size. Vipshop said it plans to issue up to $400 million worth of convertible bonds, with an option for another $60 million if the offer is well received (company announcement). The company added it also plans to make a secondary offering of 1.14 million American Depositary Shares (ADSs), with an option to issue an additional 171,000. Based on Vipshop's latest closing price, it could raise up to $200 million through the secondary share offer.

That means that when combined with the debt offering, the company could raise up to $660 million through this new fund raising exercise. The exercise would parallel similar fund-raising by Internet stalwarts like Baidu (Nasdaq: BIDU), Ctrip (Nasdaq: CTRP) and SouFun (NYSE: SFUN), all of which have collectively raised billions of dollars in new funds over the last 18 months through new convertible bond offerings. (previous post)

But Vipshop is quite unlike those stalwarts, most of which have been publicly traded for 5 years or more and are sector leaders. Vipshop has only been listed for 2 years, and only recently turned profitable. What's more, it isn't one of China's top 3 e-commerce firms, though its rapid growth and focus on the discount retail space has quickly made it a darling of investors.

In the current climate where investors have suddenly fallen in love with the China Internet story, $660 million really doesn't look all that major anymore. Vipshop rival, China's second largest e-commerce firm, recently filed for a New York IPO to raise up to $1.5 billion, which would become the largest such offering by a Chinese Internet company in the US. Leading web portal Sina (Nasdaq: SINA) has also hired investment banks for a New York IPO for its popular Weibo microblogging service, seeking to raise up to $500 million - a sum that would normally be difficult to raise.

The sudden fund-raising frenzy and the ever-rising targets have all the signs of a bubble, which explains why Vipshop wants to raise its cash sooner rather than later. I've previously predicted that the current enthusiasm towards Chinese Internet offerings is likely to fizzle by the middle of the year, as investors quickly tire of the billions of dollars in new offerings that are suddenly coming to market.

That said, this Vipshop offering does look well-timed, and I expect the company should be able to raise most of its target. Strategically speaking, we can probably expect to see Vipshop use the money for one or two major acquisitions in the second half of this year. Vipshop already made its first major such move when it bought a controlling stake in last month for $132 million. There are currently many more bargains out there in China's overheated e-commerce sector, and I fully expect to see Vipshop make its own major purchase for $200 million or more within the next few months.

Bottom line: Vipshop should be able to get most or all of the $600 million it is targeting in a new fund-raising plan, and is likely to make 1 or 2 major acquisitions later this year.

Disclosure: No positions