Yahoo! Inc. may rise 65 percent by the end of the year after Chinese e-commerce giant Alibaba Group Holding Ltd. goes public later this week, according to bets by structured-products buyers.
Investors are piling into call warrant and knock-out certificates that pay a return if Yahoo’s share price climbs above a pre-defined level. Some are betting Yahoo will increase to as much as $70 by Dec. 29, according to data compiled by Bloomberg. The stock rose to an eight-year high of $42.88 last week and closed at $42.71 yesterday in New York.
“At the moment, Yahoo is one of the most common U.S.-based underlyings trading in Germany,” said Heiko Geiger, the Frankfurt-based head of public distribution of structured products for Germany and Austria at Bank Vontobel Europe AG. “We hadn’t seen it for months.”
Yahoo's 35% of Yahoo Japan stake is worth $5 billion assuming they unwind the stake at current levels and pay all taxes (which there’s probably a good solution for avoiding). The core business of Yahoo is worth $10 billion to a strategic buyer knowing full well that they can cut headcount by 10,000 people and see an enormous jump in headcount. So that’s $26 billion right there.
Then we have 16.3% of Alibaba. What’s that going to be worth post-IPO? My guess is that Alibaba will trade up to $90/share or a market cap of $215 billion. That means Yahoo’s remaining stake would be worth $35 billion assuming Yahoo avoids taxes on that stake (which I think is highly likely when they dispose of the stake a year from now in Hong Kong and keep the money overseas to borrow against). If you assume Yahoo pays full taxes on that stake (which they won’t), it’s worth $23B.
But Yahoo’s not going to sell its stake right away. They’re going to keep it for another year. What’s it going to be worth then? No one knows for sure but my modelling suggests Alibaba will be trading around $111/share a year from now or $275 billion. If true, the Yahoo stake will be worth $45 billion untaxed (which I think is the correct way to think about what will happen when they liquidate their stake in the jurisdiction of Hong Kong).
So you have in Yahoo’s stock a collection of assets where the Alibaba stake would be worth $45 billion in a year from now and everything else would be worth $26 billion. Combined that’s $71 billion in assets potentially — or about $71/share.
The New York Times reports that Alibaba will raise the price of its initial public offering (IPO). The demand for shares has been terrific.
Demand is great enough that many individual investors cannot get shares. As a matter of fact, according to CNBC, some of the largest U.S. investors may push to get what modest number of shares may be available:
Billionaire investor Leon Cooperman is one of Alibaba’s fans.
Three other major hedge fund investors who have shown interest in the IPO are Dan Loeb of Third Point, David Tepper of Appaloosa Management and Dan Benton of Andor Capital Management.
The decision probably makes sense. Obviously, a higher price would yield more capital for the company. It also would help prove that Alibaba’s nearly mythical rise over the past decade to being the e-commerce engine of China was as extraordinary as the company claims.
One of the reasons bankers will raise the price is that tech IPOs of the past year have routinely been underpriced, which has robbed companies of capital and caused huge surges in prices the first day of the IPOs. While the increases may be impressive, they are a sign of how poorly underwriters do when gauging demand.
Alibaba Group Holding Ltd has received enough orders for its record-breaking initial public offering to cover the entire deal within just two days of its launch, people familiar with the IPO process said on Wednesday.
At the top end of expectations, the Alibaba IPO would raise $21.1 billion, topping Facebook Inc's $16 billion listing in 2012 as the largest-ever technology IPO.
Alibaba, could set a new record for the world's biggest IPO if underwriters exercise an option to sell additional shares to meet demand - putting it as high as $24.3 billion, and overtaking Agricultural Bank of China Ltd's $22.1 billion listing in 2010.
Sunnyvale, California-based Yahoo, which is selling shares in Alibaba's trading debut, will retain a 16.3 percent stake in the Chinese company and much of Yahoo's value is tied to that stake. If Yahoo sold those remaining shares, it would have to pay a large amount of taxes, whereas it wouldn't if Alibaba instead acquired Yahoo, Jackson said.
"There's basically $12 billion in tax savings that Alibaba can get, which others can't," he said, adding that Alibaba could then choose to sell Yahoo's core business to a private-equity firm such as Silver Lake Management LLC, which also owns shares of Alibaba. Silver Lake is the firm that teamed up with Michael Dell last year to take Dell Inc. private.
It's a "more elegant way" for Alibaba to buy back its shares from Yahoo and lower the price, said Ryan Jacob, manager of the Jacob Internet Fund, which owns Yahoo stock.
There’s no shortage of enthusiasm for Alibaba Group‘s (BABA) fast-approaching IPO, or for Yahoo (YHOO) shares, which reached a fresh 52-week high yesterday.
Yet some analysts see the IPO pushing Yahoo’s stock even higher, including MKM Partners’ derivatives strategist Jim Strugger and analyst Rob Sanderson.
MKM sees Yahoo as a still-attractive way to play the Alibaba IPO, despite its recent gains.
From Srugger’s note:
YHOO spent much of the year in the $34-$36 range, a level at which Rob viewed its stub (excluding BABA and Yahoo! Japan stakes and cash position) as being valued near zero. On the derivatives side we represented potential upside several times via positions that provided YHOO exposure into the mid-40′s.
While YHOO has rallied above $41 including a 5.6% jump yesterday (Nasdaq up 0.20%), we think there remains an opportunity to participate in the BABA IPO.
Three unknowns will significantly impact the value of YHOO: 1) the IPO price of BABA; 2) how BABA trades in the public market and 3) the tax treatment of subsequent BABA shares sold by YHOO. Rob estimates that BABA will price around 25x his CY15 estimate of non-GAAP earnings and then trade into the 30x-35x range. That compares to Facebook (FB) at 37x.
On a fully taxed basis this equates to a valuation range of $20-$24 with a tax-free spin adding back $12-$15. The total BABA stake is valued in the range of $26-$45 per share. Add back the investment in Yahoo! Japan, cash and the stub and there clearly remains potential upside in YHOO.
Even with YHOO having increased sharply, exposure to upside in both the IPO pricing and public market trading can be had; we like participating via November 43/48 calls spreads for $1.53.
James Cordwell of Atalantic Equities has a $100 price target for Alibaba and that Cantor Fitzgerald‘s Youssef Squali reckons the IPO could help ultimately boost Yahoo! shares to $49. Yahoo jumped 5.6% on Monday, closing at $41.81.
Henry Guo of JG Capital also started his coverage, giving Alibaba the same price target of $100.
James Cordwell of Atalantic Equities, started Alibaba with an Overweight rating, and a $100 price target.
Cordwell sees the company continuing to gobble up e-commerce share. AAlthough “competition is likely to remain intense,” he concedes, from JD.com (JD), the other big Chinese e-commerce vendor, which went public earlier this year, nevertheless, “Alibaba's scale, broad reach beyond Tier 1/2 cities and brand support should enable it to broadly maintain its share of the Chinese ecommerce market, which we expect to grow at a 30% CAGR over the next three years.”
Billionaire Masayoshi Son, Japan’s most acquisitive executive, is raising a war chest that will be used to buy Yahoo.
Son’s SoftBank Corp. is selling almost $4 billion in bonds to help finance a Yahoo deal after the company scrapped a merger of its Sprint Corp. with T-Mobile US Inc. Yahoo's Internet, music or entertainment exposure will help bolster Son’s global technology empire and increase Sprint’s appeal to consumers by widening their choice of content to download.
Shares of Yahoo jumped more than 5 percent on Monday, closing at $41.81, as traders awaited the upcoming initial public offering of Chinese e-commerce giant Alibaba, of which Yahoo owns some 22.5 percent.
On CNBC's "Fast Money" on Monday, Pete Najarian laid out the bull case for Yahoo, saying that he's convinced the stock is "going to $50 per share."
According to Najarian, options traders have been pointing toward a move higher in the stock for some time. "I see the options activity has been telling this … this story was playing out when it was $18 and $20 a share, no one wanted to embrace it because they said, 'There's no growth in this company.'"
Najarian said that Alibaba's upcoming IPO has shifted investor sentiment for Yahoo despite fears of slow growth.
"The longer people stare at Alibaba now that it's finally on the cusp of being an IPO, people are even more excited about this," he said.
Alibaba Group Holding Ltd. plans to start meeting investors in New York on Sept. 8, ahead of its initial public offering later this month, two people with knowledge of the matter said.
The Chinese e-commerce company’s roadshow will take about two weeks and include stops in the U.S. and Asia, the people said, asking not to be identified discussing private information. Alibaba currently plans to set a price for the IPO on Sept. 18, with trading to follow the next day.
Bank of America-Merrill Lynch raised its price target for Yahoo! to $40 from $39 Thursday, reiterating its "buy" rating.