Friday, September 23, 2011

Alibaba Worth $32 Billion, Yahoo Worth?

Figuring out the value of Alibaba Group was a bit of a parlor game as Alibaba Group has dominant businesses that are not listed. is the only listed entity in the group.

The value of Alibaba Group is a crucial factor in determining the value of Yahoo Inc. (YHOO) stock.   I posted Dan Loeb's analysis here.  This is based on his letter to the YHOO board in September 2011 so the values are still pretty fresh. 

Anyway, it was reported last night that DST Global and Silver Lake Partners will invest up to $1.6 billion in Alibaba Group, valuing the whole group at $32 billion.    The buying group includes Yunfeng Capital which Jack Ma owns. 

This is interesting in a couple of ways.  First of all, the fact that Jack Ma's Yunfeng Capital is in the buying group is encouraging in that it means Ma thinks this is a good price (to buy Alibaba Group).  It's nice when the founder and owner validates a valuation by purchasing a stake at that price.  This is the opposite of owner/founders selling into an IPO, for example.

Second of all, the fact that Silver Lake Partners and other institutions are buying into this also starts the clock on an IPO or some sort of exit strategy for Alibaba Group.   Private equity firms typically buy unlisted companies looking to get out via a sale or IPO.  In this case, the exit is likely to be an IPO as large high growth technology companies typically do an IPO instead of sell itself privately to another entity.

Why is this interesting?  When Yahoo Inc. and Softbank were arguing with Jack Ma about their stake in Alibaba Group and Alipay, Ma has stated that he has no intention of doing an IPO for Alibaba Group.  He said it was completely off the table and not even on the horizon.

The fact that private equity money is coming in changes that a bit.   I doubt Silver Lake would invest in an open-ended situation.  The clock is going to run now like it hasn't before.   Also, the fact that a private equity firm has bought into Alibaba at a $32 billion valuation implies that Alibaba is worth far more than that.  Private Equity firms don't buy stakes at fair value.  They only buy with an expectation of high return.

This, of course, is good for YHOO, as they now have 'allies' with interests in seeing their Alibaba stake monetized.  And of course, an IPO would be the best way for YHOO to monetize the position if they can spin it off tax free(as opposed to selling their Alibaba stake in a private transaction that might give YHOO a hefty tax bill).

So what is YHOO worth now?  I still think Loeb's analysis is not far off and is a very conservative view.

But let's take a look at a simple view assuming they can spin off these positions tax efficiently at some point.

Here are the big peices of YHOO's value:

Yahoo Japan stake:        $6 billion
Alibaba Group:              $12.8 billion (40% of $32 billion)
Total:                             $18.8 billion

Yahoo also has a lot of cash, cash equivalents, short term debt securities and long term debt securities.  The total of that is $3.26 billion.

All of that together gives you $22.06 billion in value before considering YHOO's operating business.  This $22 billion comes out to $17.51/share, versus a stock price in the $14.70.

What is Yahoo's operating business worth?  Nothing?  I think not.  In the first half of 2011, YHOO's operating business generated net income of $272 million.  This excludes income on investments and equity income and is after tax.

Annualize that and you get $544 million.   That comes out to $0.43/share of eps.  At 10x p/e, that comes to $4.30/share in value.

Add that to $17.51 of cash, investments and their Asian holdings, that comes out to $21.80/share.

If you assume a 40% tax rate on their Asian holdings, the total number would be a bit lower.  Total investments and cash would be $11.56/share.  Deduct that from the current stock price of $14.70 and you get $3.14 price for the operating business that is earning $0.43/share.  So that's a p/e of 7.3x p/e.

In any case, that's just a quick look at Yahoo.  There is a chance that YHOO is worth far higher, as Loeb says, due to the growth of Alibaba and even slight operational improvements in YHOO's main, U.S. business.

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