Alibaba deal a boon for Yahoo
The stuggling company's agreement to sell half its stake to Alibaba for $7.1 billion is a win-win for both names.
By Eric Jackson
After all the bad blood between Alibaba and Yahoo (YHOO) over the last years, few thought there was a high likelihood that a deal would ever get done.
But it did happen. The Chinese e-commerce giant is going to buy back about half of Yahoo's 40% stake in its company, gaining more control over its operations and giving Yahoo a much-needed injection of cash.
Yahoo will sell half its stake, or 20% of the total, to Alibaba for $7.1 billion in cash and preferred stock. Yahoo also agreed to sell 10% of its holdings as part of a future Alibaba IPO and the remaining 10% at an indefinite time in the future.
That's important, as some people assumed Yahoo would have to sell its other half at the IPO. I think Alibaba could be worth $150 billion by 2016. If Yahoo still held its final 10%, it would be worth $15 billion.
There is no IPO date yet for Alibaba, and nothing in the agreement forces it into an IPO by a certain date. However, let's assume that the company has its initial public offering a year from now or mid-2013. I think there is a good chance it could be worth $50 billion by then. Even at $45 billion, Yahoo! would generate another $4.5 billion pre-tax as part of selling that 10%.
This deal is great because it starts to get the market thinking about what these remaining asset deals might truly be worth to Yahoo by then. Before Sunday's announcement, the majority believed you couldn't count on an Alibaba deal happening.
There is more good news. Alibaba agreed to pay an additional $550 million up front to keep running Yahoo China, while also licensing patents to Yahoo. I fail to see how Alibaba will benefit from this. It just bumps up the $7.1 billion value for the 20% stake to $7.65 billion, which means it's really valuing Alibaba at $38.25 billion.
So now Wall Street has to up its targets on Yahoo. With more cost rationalization, Yahoo's "core" can probably get to $10 billion. After the deal closes, the company will have cash of $7 billion (after taxes). The remaining Alibaba stake post-taxes seems worth $12.5 billion, but maybe that will be discounted back to $6 billion. Yahoo Japan seems worth at least $3 billion post tax.
Add it up, and you have $26 billion, or $21.15 a share, as a fair price.
Hopefully, this deal will spurt get people to start running their spreadsheets on Yahoo -- and this is before any debt raise or settlement of its lawsuit against Facebook (FB).
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While the former looks to expand its snack and soda exposure, the latter struggles to stabilize management.
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