Alibaba’s IPO Price Likely to Boost Yahoo’s Stock Price Estimate

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Yahoo!’s (NASDAQ:YHOO) core business has failed to gain traction despite numerous website and product refreshes. However, the stock has performed exceedingly well over the past month as its price has soared from $35 to over $40. The primary reason for this trend has been Yahoo’s 22.5% investment in Chinese online retailing giant Alibaba. In an update to its F1 filling, Alibaba has stated that it plans to raise close to $24.2 billion through sale of 320.1 million American depository shares in its IPO at an anticipated price between $60 to $66. This would translate into a valuation of $155 billion for Alibaba based on 2.34 billion ordinary shares outstanding immediately prior to the offering and at the mid point of the price offering i.e. $63. [1] Yahoo will sell 121.73 million shares at Alibaba’s market debut and provide underwriters an option to purchase an additional 18.26 million shares. In this article, we will discuss the impact Alibaba’s valuation on Yahoo’s stock price.

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Alibaba – A Retailing Behemoth

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Alibaba Group Holding Ltd is China’s biggest online retail company. It generated nearly $8.46 billion in revenues and $4.01 billion in net income during the fiscal 2014 (ended in March). Alibaba’s net income at $3.77 billion, is more than the combined earnings posted during the same 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 $296 billion from 279 million active buyers in the 12 months ended June 30. 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’s Impact On Yahoo’s Valuation

Based on the details disclosed in the F-1 filing, the market capitalization of Alibaba would be $147.54 billion at the mid point of the band offering (i.e $60-$66 per share). At this valuation, the pre-tax value of Yahoo’s 22.5% stake in the company work out to around $32.98 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 140 million shares. This translates into $8.82 billion valuation for this stake of Yahoo. While Yahoo plans to distribute 50% of the after tax proceed to shareholders, it will continue to hold on to over 400 million shares, a 16.3% stake that could be worth more than the current value of $24.16 billion at the mid point of price range.

According to our calculations, if Alibaba’s stock were to be sold at the mid point of  the price range then Yahoo’s cash position will improve by $2.86 billion (on the assumption that the company will pay 35% tax on $8.82 billion and distribute 50% of the proceeds to share holders as one-time dividend). Additionally, the valuation of remaining stake of Yahoo would be $24.16 billion. Based on this calculation, Yahoo’s stake in Alibaba now stands at $32.98 billion compared to our conservative estimate of $22.8 billion earlier. However, this valuation is prospective based on the initial F-1/A fillings, and  the overall valuation of Yahoo is subject to the demand for Alibaba’s stock. Where it will trade once the shares are on the market is to be seen.  Therefore, we will adjust the model once we value Alibaba post its IPO.

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Notes:
  1. F-1/A, www.sec.gov []
  2. F-1/A, www.sec.gov []