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Yahoo to spin off Alibaba stake

By Reuters
San Francisco, 28 Jan 2015

Yahoo plans to spin off its 15% stake in China's Alibaba, responding to pressure to hand over to shareholders its prized e-commerce investment valued at roughly $40 billion.

Shares of Yahoo rose about 7% to $51.45 in after-hours trading yesterday, following the tax-free spinoff announcement and earnings which just beat analysts' forecasts even as its revenue slightly lagged estimates.

The move to spin off the Alibaba stake satisfies a persistent investor demand, but could also ratchet up pressure on Yahoo CEO Marissa Mayer to make quicker progress in strengthening Yahoo's struggling media and advertising business.

"It's not going to be easy from now on," said B Riley and Co analyst Sameet Sinha. "She has to perform now. There's nothing shielding her."

Shareholders feel Yahoo and its stake in Alibaba would be worth more separately, as long as the Alibaba shares are not subject to the standard 35% tax rate that would be incurred from selling the shares.

Yahoo was worth about $45 billion at Tuesday's market close. That includes its Alibaba stake of nearly $40 billion, meaning the current Yahoo share price assigns little value to the core business. Some investors believe the e-mail, Web site and other operations are worth between $7 billion and $8 billion.

Yahoo, which is trying to reverse a multi-year decline in revenue, has faced increasing investor pressure more than two years after Mayer took the reins to lead a comeback plan.

Activist investor Starboard said in September it had acquired a significant stake in Yahoo and urged the company to cut costs, consider a merger with AOL and quickly "monetise" the Asian assets.

"It's the best possible outcome," BGC Partners analyst Colin Gillis said of the Alibaba spinoff plan. "The main point is that the money goes to shareholders, it doesn't get spent on acquisitions. They don't want to fritter it away."

Mayer promised investors during a conference call yesterday that the company's display advertising revenue, which declined 4% in 2014, would return to growth this year. But the company's forecast for revenue in the first quarter implied continuing softness.

Yahoo said revenue, excluding fees paid to partner Web sites in the first quarter, would range from $1.02 billion to $1.06 billion, compared to the $1.09 billion in the year-ago period.

Yahoo said its board of directors has authorised a plan to spin off the stake, tax-free, into a newly-formed independent registered investment company. The stock of the company will be distributed pro-rata to Yahoo shareholders and the transaction is expected to close in the fourth quarter of 2015, Yahoo said.

The new entity will include Yahoo's 384 million shares in Alibaba as well as an unspecified "legacy, ancillary" Yahoo business, the company said.

Bank of America Merrill Lynch, Goldman Sachs & Co, and JP Morgan Securities are serving as financial advisors on the transaction.

The spinoff of the second-largest stake in Alibaba is not expected to have much impact on the management of the fast-growing e-commerce company, but will be an option for investors who for some reason do not want to buy shares in it directly.

The stake dates from 2005, when Yahoo bought into Alibaba early, paying $1 billion for a 40% stake in a deal credited to the American company's co-founder Jerry Yang.

Yahoo's revenue, excluding fees paid to partner Web sites, declined 1.8% year-on-year in the final three months of 2014 to $1.18 billion, just shy of Wall Street expectations. The average analyst polled by Thomson Reuters called for adjusted revenue of $1.185 billion.

Yahoo said it earned 30 cents per share in the fourth quarter, excluding certain items, beating by a penny the consensus forecast of analysts polled by Thomson Reuters.

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