Yahoo Seals Alibaba Deal - Analyst Blog

By Zacks | September 19, 2012 AAA

Yahoo Inc.(YHOO) has finally completed a long-awaited $7.6 billion deal with the Chinese e-commerce firm Alibaba Group Holding Ltd.  The closing of the deal comes as a relief for both Yahoo and Alibaba. Per the agreement, Yahoo sold half of its stake in Alibaba, or approximately 20% of its shares, to the Chinese e-commerce company for about $7.1 billion, comprising $6.3 billion in cash and up to $800 million in newly-issued Alibaba preferred stock. Alibaba also made a one-time cash payment of $550 million under a revised technology and patent licensing agreement with Yahoo. Yahoo had originally acquired the 40% stake in Alibaba in 2005 for $1 billion and is now reaping a huge return.

As expected by Yahoo, the deal yielded about $4.5 billion after taxes. Yahoo intends to distribute $3 billion of its after-tax cash proceeds from the deal to shareholders. This is in addition to the $646 million down payment that it has already returned to its shareholders through buybacks.

After the distribution, the new CEO Marissa Mayer will have enough cash to improve the company's offerings. Mayer wants to bring a new product focus to the company and spend some of the cash on acquisitions. We believe the company has an extra $1.3 billion, which if used prudently could revive the company's revenue growth to some extent.

Yahoo still retains roughly 20% of Alibaba's common stock, valued at $8.1 billion. According to the deal, Alibaba will have to repurchase another quarter of Yahoo's stake at the price of its initial public offering (IPO), or else the web portal has the right to sell those shares in the IPO.

Since 2006, Yahoo has been struggling to improve its financials and build shareholder confidence. But the company has failed to turn around and bring any significant financial improvement. In fact, Yahoo's competitors, both Facebook (FB) and Google (GOOG), have been consistently eating into Yahoo's business over the years. We believe that this deal has given enough cash to the new CEO to reinvest in some new initiatives that could restore Yahoo's position, as well as shareholder confidence.

The company is up against the likes of Google, Microsoft Corp. (MSFT) and Facebook, the world's most popular social-networking site.

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

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