Alibaba is expanding its empire into Southeast Asia

REUTERS/Shu Zhang

(Reuters) - China's Alibaba Group Holding Ltd said on Tuesday it has agreed to buy a controlling stake in online retailer Lazada for about $1 billion to expand its e-commerce business into Southeast Asia.

Lazada Group, founded by Germany's Rocket Internet in 2012, is headquartered in Singapore and also operates in Malaysia, Indonesia, the Philippines, Thailand and Vietnam - providing an opportunity for Alibaba to tap what it sees as Southeast Asia's tremendous growth potential.

But the market is also quite challenging and highly fragmented, with only 3 percent of the region's total retail sales currently conducted online.

Under the deal - Alibaba's biggest overseas investment so far according to Thomson Reuters data - the Chinese firm will buy about $500 million of newly issued Lazada shares and the rest will be bought from current shareholders.

These include Britain's biggest supermarket operator Tesco Plc, which said it would sell an 8.6 percent stake for $129 million, valuing Lazada at $1.5 billion. Rocket and Investment AB Kinnevik will also sell shares.

Alibaba and Lazada did not specify the size of the stake purchased but the sales imply a two-thirds holding.

The e-commerce market for business-to-consumer sales across all of Indonesia, the Philippines, Singapore, Malaysia, Vietnam and Thailand was just $10.5 billion in 2015, or 1.5 percent of retail volume, according to consultancy firm Frost & Sullivan.

By comparison, it accounts for 12 percent of retail in China, and 8 percent in the United States.

And in countries like Indonesia, e-commerce firms face logistical challenges, having to deliver purchases to dozens of islands via creaky ports and potholed roads.

Other overseas deals by Alibaba include an investment of $500 million with Hon Hai Precision Industry Co and SoftBank Group Corp in India's online marketplace Snapdeal last year.

In India, Alibaba and its online finance affiliate Ant Financial Services Group invested in Paytm, the country's largest mobile payment and commerce platform, and parent One97 Communications.

(Reporting by Rama Venkat Raman in Bengaluru and Paul Carsten in Beijing; Additional reporting by Aradhana Aravindan in Singapore and Fransiska Nangoy and Eveline Danubrata in Jakarta; Editing by Edwina Gibbs)