Yahoo Eyes Big Bucks As Alibaba Files For IPO

Yahoo! (NASDAQ:YHOO) core business has failed to gain traction despite numerous website and product refreshes. However, its stock has performed exceedingly well over the past two years, primarily due to its investment in Alibaba. In a long awaited news, Alibaba filed F-1 papers for initial public offering (IPO) of its stock. While the company has not specified either the number of shares to be sold in the IPO or the price range, it is estimated that it plans to raise at least $1 billion through this sale. ^[1] Many analysts expect the company to raise over $18 billion at a valuation of close to $160 billion. Additionally, Alibaba did not disclose the exchange that it plans to list its shares on. In this article, we will briefly discuss Alibaba’s business and the potential upside for Yahoo’s investment.

Click here to see our complete analysis of Yahoo!

Alibaba – A retailing Behemoth

Alibaba Group Holding Ltd is the biggest online retail company in the world. It generated nearly $6.5 billion in revenues and $2.9 billion in net income during the first nine months of fiscal 2014 (ends in March). Alibaba’s net income is more than the combined earnings of $2.4 billion posted during the same April-December period by eBay and Amazon last year.

The company operates seven verticals that cater to different segments of e-commerce. It operates three digital marketplaces, Taobao Marketplace, China’s largest online shopping destination; Tmall, China’s largest third-party platform for brands and retailers; and Juhuasuan, China’s most popular group buying marketplace. These three marketplaces, which comprise its China retail marketplaces, generated a combined grand merchandise value (GMV) of RMB1,542 billion (US$248 billion) from 231 million active buyers and 8 million active sellers in the twelve months ended December 31, 2013. In addition to these three China retail marketplaces, it also operates Alibaba.com, China’s largest global wholesale marketplace, 1688.com, China wholesale marketplace, and AliExpress, a global consumer marketplace, as well as a cloud computing service. ^[2]

IPO To Unlock Value For Yahoo

While details about the IPO are still sketchy, they are expected to become clear in the next three to four months as the process nears completion. Based on the earnings disclosed in the F-1 filing, we conservatively estimate the value of Alibaba at $95 billion, which is our base case scenario. At this valuation, the pretax value of Yahoo’s 24% stake in the company work out to around $22.8 billion. Yahoo’s amended share repurchase agreement with Alibaba reduced the maximum number of shares that the company is required to sell in a qualified IPO to 208 million shares. If Yahoo were to offload this stake at the estimated conservative valuation, it can unlock close to $5.63 billion post tax. However, if we were to consider the estimated valuation of over $150 billion used by majority of the Wall Street analysts, the shares held by Yahoo could be worth much more. While Yahoo can retain the proceeds from the sale to bolster its cash position and utilize it for future acquisitions, Yahoo could also use some of the proceeds to buy back shares from shareholders. In any case, the proceeds from Alibaba’s investment will unlock value for Yahoo’s shareholders.

We currently have a $34.83 price estimate for Yahoo!, which is inline with its current market price.

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1. China’s Alibaba files for landmark IPO, May 6 2014, www.cnn.com [↩]
2. F-1, www.sec.gov [↩]