Yahoo to sell an Alibaba stake for $7.1 billion, shares rise
Under the agreement, Yahoo will sell one-half of its stake in Alibaba for at least $6.3 billion in cash and up to $800 million in new Alibaba preferred stock. The deal, announced on Monday, caps years of often-acrimonious talks between Alibaba and Yahoo over how the Chinese company could reclaim some or all of the stake that Yahoo bought for about $1 billion in 2005.
Investors pushed up Yahoo shares as much as 3.8 percent after the news even though the reaction was tempered by a big tax bill and questions about Yahoo's core business, which has been losing ground to Google Inc and other rivals. After tax, the proceeds for the deal will be $4.2 billion, according to Yahoo.
"It's better to show a path to monetization rather than wait for tax efficiency if that was proving too difficult to achieve," said Ronald Josey, an analyst at Thinkequity LLC. Now that the deal has resolved a major distraction for Yahoo shareholders, they may put even more pressure on management to solve problems in the core business, such as the decline in advertising revenue, Josey said.
"Now this hurdle is over, shareholders are looking at how Yahoo could right the ship from a fundamentals perspective."
Yahoo has been trying for some time to cash in on its Alibaba investment but its efforts have been hurt by management turmoil. While Ma had a strong rapport with Jerry Yang, the Yahoo co-founder who led the initial investment in Alibaba, ties between the two companies soured when Yang was ousted and replaced as Chief Executive by Carol Bartz, who left last year.
Talks over a deal for Ma, who owns nearly 7.5 percent of Alibaba, to buy back most of the Yahoo stake for up to $9 billion faltered earlier this year over valuation.
Alibaba has long been the dominant player in China's booming e-commerce sector, but the landscape in the world's biggest Internet market is evolving, with Amazon.com Inc, Dangdang Inc and 360buy emerging as tough competitors.
The deal was finally announced just days after yet another management revamp at Yahoo, which appointed a new interim CEO in the last week and gave three of 11 board seats to Third Point, the hedge fund run by activist investor Dan Loeb.
Interim CEO Ross Levinsohn said the timing of the deal was a coincidence as Yahoo had been negotiating for months. Yahoo will consider collaborating with Alibaba on new initiatives, he said.
"We're happy at the way this has evolved in the last few months," Levinsohn said, suggesting one option could be for Yahoo to help Alibaba expand beyond China. "It's a big step forward that we're talking about strategic initiatives."
Yahoo has been under fire from shareholders for failing to move aggressively to reverse its decline in ad revenue in the face of competition from Google and Facebook.
It said that it will hand most of the proceeds from the Alibaba stake sale, after taxes, to shareholders.
"For Yahoo it's a decent compromise ... I think they sold it off at a pretty reasonable valuation," said Michael Clendenin at RedTech Advisors in Shanghai. "Yahoo still has a lot of bigger problems ahead of them. I mean, they are a portal, so they're going the way of the dodo bird."
"Credit to Jack Ma. He's a wheeler and dealer, and he got a very good deal on this one," he added.
IPO incentives
A source familiar with the deal said Yahoo built in incentives for Alibaba, which operates the popular Chinese online marketplace Taobao, to hold an IPO by the end of 2015. Alibaba would buy back one-half of Yahoo's remaining stake – a 10 percent holding - at the IPO price or allow Yahoo to sell those shares in the offering before the end of 2015.
Taobao has about 90 percent of the market in China's consumer-to-consumer online trading and more than 53 percent of the business-to-consumer market.
Alibaba Group, valued at $30 billion to $35 billion, listed its Alibaba.com unit in 2007, and last February agreed to take it private.
"The valuation is reasonable ... but I don't think this is going to affect the IPO strategy," said Elinor Leung, an analyst at CLSA. "I don't think the IPO is going to be imminent, meaning this year. Net-net, this is going to be positive for Yahoo because you cash out on half the stake, but Yahoo's main worry is their U.S. business."
Alibaba said it would raise the money for the deal through a mix of cash, debt and equity.
Sources said the group was in talks with existing shareholders, including Singapore state investor Temasek Holdings Pvt Ltd, to raise about $2.3 billion in equity to partly finance the deal.
Yahoo confirmed that Alibaba would look at private equity financing. Alibaba was not immediately available to comment and a Temasek spokesman declined to comment.
Temasek bought shares from Alibaba employees in September in a tender offer in which DST Global, Silver Lake and Yunfeng Capital also took part.
According to Basis Point, a Thomson Reuters publication, Alibaba is likely to increase a $3 billion loan for taking its listed unit private to $4 billion.
Simplifying Yahoo
Yahoo's Alibaba stake and its 35 percent holding in Yahoo Japan - jointly owned with Softbank Corp – are considered the crown jewels of the U.S. Internet company.
Yahoo shareholders have been anxious for the company to translate the holdings into cash and return proceeds to shareholders. Softbank owns about 30 percent of Alibaba.
Analysts have said selling off the Asian assets would raise cash for Yahoo and simplify its structure, making it easier for investors to value its core U.S. operations.
Yahoo said it would return "substantially all" of the after-tax cash proceeds from the deal to shareholders, increasing a planned share buyback authorization by $5 billion.
The deal was an early boost for interim CEO Levinsohn, the fifth person in the top job in the past five years. Yahoo has suffered from falling revenue, layoffs, management reorganizations and executive departures.
Many analysts expect Levinsohn to re-orient the company around its media properties, including Yahoo Sports and Yahoo Finance, while focusing less on expensive technology efforts such as search and social networking.
Levinsohn follows Scott Thompson, who resigned earlier this month after he was accused of overstating his qualifications, and Bartz, who was fired last September.
Comeback plan
Finalizing a deal with Alibaba could allow Levinsohn to focus on a comeback plan, while potentially earning goodwill from investors who are frustrated by missteps and poor performance.
"For Yahoo, this is something that needed to get done because Alibaba was having a bit of an issue with ... the group being so dominantly owned by foreign entities," Nomura Securities analyst Jin Yoon told Reuters.
"The China asset was kind of their crown jewel so I don't actually expect Yahoo to fully depart from China and I do expect Yahoo will have some sort of remaining involvement with Alibaba Group."
Sunnyvale, California-based Yahoo and Japan's Softbank agreed to cap their shareholder voting rights in Alibaba at below 50 percent, effectively keeping foreign ownership in check, said one source familiar with the matter.
In addition to the share repurchase, Yahoo and Alibaba will amend their existing technology and intellectual property licensing agreement. Alibaba will continue to operate Yahoo China under the Yahoo brand for up to four years.
Yahoo will be freed from restrictions on making other investments in China. Alibaba will make an upfront lump sum royalty payment of $550 million to Yahoo and pay royalties for up to four years.
UBS was lead financial adviser to Yahoo, while Credit Suisse advised Alibaba.
Yahoo shares were up 1 percent at $15.57 on the Nasdaq on Monday afternoon, off an earlier high at $16.00.
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