Yahoo Without Its Alibaba Stake May Lure Buyers: Real M&A

By Tara Lachapelle

Yahoo! Inc. (YHOO) will be a fraction of its size should the company spin off its remaining stake in Alibaba Group Holding Ltd. (BABA), making it a takeover candidate for SoftBank Corp. or private-equity firms.
Marissa Mayer, chief executive of the $46 billion company, is expected to give an update next week about whether Yahoo will sell its Alibaba shares and how it will avoid paying taxes on the move. With the Chinese e-commerce company accounting for most of Yahoo’s value, shareholders would be left holding a U.S. Internet advertising and search business worth about $5 billion to $8 billion, according to analysts’ estimates compiled by Bloomberg. Yahoo will also still have a roughly $8 billion stake in Yahoo Japan Corp. (4689)
SoftBank could buy Yahoo to increase its own Yahoo Japan stake, though its unclear how much the Japanese wireless carrier would be willing to pay for a U.S. business that’s
under pressure. A private-equity suitor could be lured by the cash Yahoo’s operations generate. Or Alibaba could always just take over Yahoo and retire the Alibaba stock that Yahoo owns, gaining some exposure to the American technology market.
“Marissa Mayer has to make a very big decision, and it will either involve splitting the company up or doing nothing,” Neil Doshi, a San Francisco-based analyst for CRT Capital, said in a phone interview. If it casts off the Alibaba stake, “the acquisition size becomes much more manageable, and we think Yahoo could become a much more compelling target.”

Photographer: David Paul Morris/Bloomberg

Marissa Mayer, president and chief executive officer of Yahoo! Inc., said in October... Read More

Alibaba Value

Mayer said in October that she will report back to shareholders by the next earnings release on Jan. 27 with an update on its plans for the rest of its Alibaba holding.
“Many have pointed out the value accretion that would occur if this final tranche were to be taxed upon sale at a lower rate than the previous sales,” Mayer said at the time. “We are acutely of aware of this. We have the best tax experts in the country, working intensively on structures to maximize the value to our shareholders of our remaining stake in Alibaba.”
Yahoo owns about 384 million shares of Alibaba, which it can’t sell until September, the one-year anniversary of Alibaba’s U.S. initial public offering. The stake is worth about $40 billion, while its Yahoo Japan stake is valued at about $8 billion. That means investors buying Yahoo’s stock today get to own the core U.S. business for free and aren’t giving the company credit for its roughly $7 billion of net cash.
“The U.S. business is still cash generative -- it’s not worth nothing,” Brett Harriss, an analyst for Gabelli & Co. in Rye, New York, said in a phone interview.

Stake Options

An approach favored by some shareholders would be a tax-free spinoff of the Alibaba shares into a separate company, with the value going to Yahoo investors and leaving Mayer with a much smaller business to run. Another tax-free alternative known as a cash-rich split would require Alibaba or another affiliated company to give Yahoo cash and an active business in exchange for its Alibaba shares.
Without the Asian assets, Yahoo’s core business alone may be valued at six times earnings before interest, taxes, depreciation and amortization, or about $8 billion, according to Gabelli’s Harriss. CRT Capital’s Doshi pegs it at $5 billion to $6 billion.
In either case, it would be much easier for a buyer to digest. And Asian companies are scouting out American technology and media targets.

SoftBank, Tencent

Tokyo-based SoftBank (9984), which controls wireless carrier Sprint Corp., has been looking for more U.S. investments. SoftBank and Yahoo also are the biggest shareholders in Yahoo Japan.
Similarly, Tencent Holdings Ltd. (700), China’s second-largest Internet company, could be a logical suitor for Yahoo as it tries to expand in the U.S., according to Doshi at CRT Capital.
With Yahoo gaining mobile-advertising market share, it could even be a compelling target for Microsoft Corp. (MSFT) as the $379 billion software provider falls behind in mobile Internet, Doshi said.
Starboard Value LP, the activist investor putting pressure on Yahoo’s management and board, says Yahoo should explore a merger with AOL Inc., estimating as much as $1 billion of cost savings from such a transaction.

Awaiting Word

Of course, Alibaba could just decide that it wants Yahoo.
Next week’s earnings call should give investors better insight into Mayer’s plans, though many analysts say she’s unlikely to want to manage a smaller company or sell it.
“It’s certainly going to be a call that’s greeted with interest and a call where the core business is going to be an afterthought,” Colin Gillis, a New York-based analyst for BGC Partners, said in a phone interview. Before any potential acquisition, “you’ve got to get through breaking the entities apart. That’s step one.”
Figuring out a tax-efficient way to divest the Asian stakes could take more time, said Scott Kessler, a New York-based analyst for S&P Capital IQ. So he’s not expecting a big breakup announcement next week.
“My reading is that they’re going to provide an update, not some definitive decision,” Kessler said in a phone interview. “These issues may be a lot more nuanced and complicated than people appreciate.”