Wednesday, 23 May 2012

Yahoo and Alibaba's Share Deal: Is Stock Trading Part Of The New Business Plan?

The last time I wrote about Yahoo, they'd just got rid of scandalous CEO Scott Thompson and replaced him with an interim pending the board elections later this year. They'd also kissed and made up with Third Point's Daniel Loeb, who is now a director. Now they seem to be moving from patent trolling into stock dealing, having finalised a deal with Chinese ecommerce website Alibaba. How does this fit into Loeb's vision for the company?

Loeb's website detailing his plans for Yahoo has since been redirected to Yahoo's Finance section, so I had to go elsewhere to get the data I needed. Here, in a nutshell, was Loeb's assessment before he got onto the board:

The after-tax value of Yahoo’s Asian assets — Alibaba and Yahoo! Japan — currently constitutes $11 per share of its value (73%), with an additional $2 per share of net cash.

Central to our investment thesis is the hidden jewel in the Asian asset portfolio, and indeed in Yahoo itself: Yahoo’s 40% stake in Alibaba Group, the dominant e-commerce platform in China... with 49% market share... the #2 share of the Chinese online ad market (17%, behind Baidu at 28%). Particularly exciting is Alibaba’s share of China’s rapidly growing B2C market represented by Taobao Mall, or Tmall (recently renamed Tian Mao).

He believed it was a great little earner that needed to be developed as part of an overall strategy to build up Yahoo's portfolio of companies and therefore its value.

However, in a new development, Yahoo has made a rather convoluted buy and resell deal with the ecommerce giant to make a killing when it goes public later on this year.

The deal

1. Alibaba will buy up to one-half of Yahoo!'s stake in the company, or approximately 20% of Alibaba's fully-diluted shares.

2. Yahoo then buys the shares back after the IPO, making a profit on the difference between the pre-IPO and post-IPO share value.

3. This difference, about $2.1 billion, goes to the shareholders. Yahoo stands to make upwards of $4 billion overall, due to tax considerations.

At the minimum price and assuming the initial repurchase of the full 20% stake, Yahoo! would receive from Alibaba consideration of approximately US$7.1 billion, composed of at least US$6.3 billion in cash proceeds and up to US$800 million in newly-issued Alibaba preferred stock. -

Shareholders shouldn't get too excited. The return of cash touted on Yahoo's press release does not mean they're getting a windfall: they'll be receiving some of their shares back from the sale as cash. This is known as a return of capital.

The deal also means that the actual owners of Alibaba are more clearly defined.

Lastly, the Alibaba voting rights for both Yahoo and SoftBank are much diminished in the new deal, according to sources, to under 50 percent.

Translation: Alibaba CEO Jack Ma is now in the driver’s seat completely. - All Things D

Yahoo and Alibaba had been quibbling over this for some time so finally it can focus on its core business of advertizing and content. Whether or not stock trading and patent trolling will continue to be part of the mix remains to be seen.

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