Yahoo Inc. (YHOO) is revisiting a proposed deal to reduce its 40% stake in Chinese e-commerce company Alibaba Group Holding Ltd. and sell its 35% ownership position in Yahoo Japan.
The proposal values Yahoo’s 40% stake in Alibaba at about $12 billion and its 35% stake in Yahoo Japan at about $5 billion. Hence, the total value of the sale for the Asian assets is valued at $17 billion to $18 billion.
Despite being one of the biggest brand names, Yahoo has not done very well in the last few years. Investors are also wary of the competitive pressure that Yahoo is under. The company is up against the likes of Google Inc. (GOOG), Microsoft Corp. (MSFT) and Facebook Inc., the world’s most popular social-networking site. It has seen its market share tumble amid this growing competition.
At this crucial moment, Yahoo needs to review its operations strategically in order to reward its shareholders and focus on its core Internet advertising business. The most positive aspect of the announcement is the clarity in value of its Asian assets, which has been questioned by some.
Analysts and market watchers have estimated varying amounts and some have stated that any return from the assets was doubtful. Particularly so, since Alipay was so easily disposed of without the consent of principal shareholders, including Yahoo.
The proposed transaction would allow Yahoo to return some cash to shareholders in the form of Yahoo’s first dividend or a stock buyback.
Yahoo’s U.S. business has suffered from declining revenue and has failed to keep up with the intensifying competition. However, Yahoo still runs one of the most popular portals on the Web, with more than 113 million users a month. By reducing its investments in Asia, Yahoo would get a huge amount of cash, which would allow Yahoo to focus on turning around its core Internet advertising business.
If the deal comes together, Alibaba and Softbank Corp., the controlling owner of Yahoo Japan, would contribute cash and certain assets to newly formed entities. Yahoo would then surrender its 35% stake in Yahoo Japan and most of its holdings in Alibaba, making the deal tax-free. Yahoo would then retain a 15% stake in privately held Alibaba, down from 42% as of September 30, according to the company’s most recent quarterly report.
Currently, Yahoo carries a Zacks #2 Rank, indicating a short-term Buy recommendation.
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