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Yahoo to Divest Stake in Alibaba

Zacks Equity Research

Yahoo Inc. (YHOO) has finally reached an agreement with the Chinese e-commerce firm Alibaba Group Holding Ltd., bringing an end to their long and bitter row.

Per the agreement, Yahoo is entitled to sell up to half of its stake in Alibaba, or approximately 20% of its shares, back to the Chinese e-commerce company for about $7.1 billion, comprising at least $6.3 billion in cash and up to $800 million in newly issued Alibaba preferred stock.

The deal also states that Alibaba will have to repurchase another quarter of Yahoo's stake at the price of its initial public offering (:IPO), a date for which is yet to be determined, or allow the Web portal to sell those shares in the IPO.

Yahoo has lost almost 65% of its value since its 2006 peak and has been struggling to improve its financials and build shareholder confidence. But the company has failed to turn around and is facing management turmoil following the recent dismissal of its third CEO in just three years.

Yahoo, which had a 40% stake in Alibaba was considered one of its most valuable assets. But for some time now, Yahoo had been trying to divest its stake in Alibaba, considering the high value it would receive for the asset and an unhealthy mutual relationship with the other stakeholders.

As expected by Yahoo, the deal will give the new interim CEO Ross Levinsohn enough cash to help bolster the company's content offerings. Alibaba was also desperately trying to get back the stake held by Yahoo so as to prevent its falling into other hands. Hence, we believe that this agreement should be a relief for both Yahoo and Alibaba, paving the way for Alibaba to achieve consolidate its holdings and Yahoo to concentrate on its U.S.business and also return some cash to shareholders.

Additionally, Yahoo granted Alibaba a transitional license to continue to operate Yahoo Chinaunder the Yahoo brand for up to four years in exchange for an upfront payment of $550 million as well as continued royalty payments.

Yahoo intends to return nearly all its after-tax cash proceeds from the deal to shareholders, most likely in the form of stock buybacks. It also increased its buyback authorization to $5 billion concurrent with the deal.

The company is up against the likes of Google Inc. (GOOG), Microsoft Corp. (MSFT) and Facebook Inc., the world’s most popular social-networking site. However, despite its struggles in the recent past, this news is likely to drive up share prices.

Yahoo shares therefore carry a Zacks #2 Rank, implying a Buy rating for the near term.

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