Yahoo Discussing Plan to Cut Alibaba Stake to 15%

DECEMBER 22, 2011   THE WALL STREET JOURNAL

By ANUPREETA DAS, GINA CHON and JOANN S. LUBLIN
Three months after firing its chief executive and opening its doors to suitors, Yahoo Inc. is revisiting a proposed deal that would shed most of its Asian assets while narrowing the Internet firm's focus and rewarding stockholders.

Yahoo is discussing a plan to substantially cut its 40% stake in Chinese e-commerce company Alibaba Group Holding Ltd. and sell its 35% ownership position in Yahoo Japan, said people familiar with the matter.

The value of the transaction for the Asian assets is about $17 billion to $18 billion, said people familiar with the matter. Yahoo's market capitalization Wednesday before news broke of the possible deal was about $18.5 billion.

The deal would allow Yahoo to return some cash to shareholders, some of whom have been agitating for better performance. It would also allow Yahoo to focus on turning around its core Internet advertising business under a new leader.

The proposed transaction is expected to be reviewed Thursday by the Yahoo board committee leading the strategic review.
Directors "want to know more" before they bless the transaction, including whether Yahoo would have to buy an operating asset, according to a person familiar with the matter. If the deal occurs, "I assume some [of the cash] will be paid out to shareholders" in the form of Yahoo's first dividend or a stock buyback, the person said.

Shares of Yahoo rose on news of the potential deal, closing Wednesday up 6%, or 88 cents, to $15.99.

Yahoo's board in September ousted its chief executive, Carol Bartz, and started a strategic review that led to the discussions with the Asian companies as well as with private-equity firms.
Although Alibaba and Softbank Corp., a large shareholder in Yahoo Japan, put forward their proposal several months ago, talks recently gained steam when the private-equity offers for a minority stake in Yahoo came in lower than what Yahoo was expecting, the people familiar with the matter said.

An Alibaba deal won't necessarily end Yahoo's talks with private-equity firms over a possible minority stake, according to the person familiar with the situation. "They aren't mutually exclusive deals," this person said.

Alibaba, China's largest Internet company run by CEO Jack Ma, became more willing to accommodate Yahoo's desire to keep an ownership stake in Alibaba, the people said. And the Alibaba-Softbank group also improved terms of its offer, the people added.

A Yahoo spokeswoman didn't respond to requests for comment. An Alibaba spokesman declined to comment.

A substantial amount of Yahoo's value has been wrapped up in its Asian assets. Yahoo's stake in Alibaba in September was valued around $13 billion. It paid $1 billion to buy the stake in 2005.
The company owns some of the Web's most popular sites and generates more than $4 billion in net revenue from online ads and other fees. But it has been outgunned in recent years by Google Inc. and Facebook Inc.

The plan for the Asian assets would involve Alibaba creating a subsidiary into which it would put several billion dollars of cash, plus an operating asset that Yahoo wants to buy using additional cash from Alibaba, almost like giving Yahoo a prepaid card for an asset of its choice, the people said.
Alibaba would swap the stock of this subsidiary for just under two-thirds of Yahoo's stake in Alibaba, the people said. The transaction would leave Yahoo with a 15% stake in Alibaba plus the cash and the subsidiary's assets. Under U.S. tax law, such a transaction isn't considered a sale, so there are no taxes levied on it.

Yahoo would carry out an identical transaction for its entire 35% stake in Yahoo Japan, which has a market value of around $6 billion.

The total value of the Alibaba piece would be more than $12 billion, with the Yahoo Japan stake exchange making up the rest for a total deal value of as much as between $17 billion and $18 billion, or around $14 a share based on 1.25 billion outstanding Yahoo shares, a person familiar with the matter said.
Tax savings account for the difference between the market price for Yahoo's shares and the $14 price offered in the Asian asset deal, the people said.

—Amir Efrati contributed to this article.
Write to Anupreeta Das at anupreeta.das@wsj.com, Gina Chon at gina.chon@wsj.com and Joann S. Lublin at joann.lublin@wsj.com


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