Alibaba Proceeds to Go to Shareholders

Yahoo has announced its plans to return proceeds from its deal with Alibaba Group Holding Ltd. to shareholders. It had originally estimated that the deal would be valued at $7.1 billion. Current estimates for the deal with Alibaba estimate it at a far higher value.

Sunday Night Deal Making

Alibaba and yahoo struck the deal late on Sunday. After a seven year relationship between the two companies, Yahoo has decided to sell 40% of its stake in Alibaba for $7.1 billion. Out of this dollar amount only $5.3 million would be in stock. The remainder will be paid with $800 million in Alibaba preferred stock. After taxes and fees are accounted for, Yahoo should make a total of $4.2 billion.

Deciding on the Price

The price of the deal comes from the $35 billion valuation of the company. The new equity developed by Alibaba is a part of the justification for the high valuation. Yahoo is also extremely interested in having the company valued as highly as possible. With a $50 billion value, Yahoo would receive $8.1 billion. Due to this correlation, Yahoo has an invested interest in ensuring that Alibaba is valued at a higher rate. Although a floor exists, there is not upper limit to the value and the current $35 billion estimate is just an approximation.

The Impact

In the last 12 months, Yahoo shares have slipped 5 percent. For many years, top market analysts have believed that the value of Yahoo was derived from its stakes in Japan and China. Analysts have worried that any sell off of Asian assets would lower Yahoo and Alibaba’s value.

Yahoo has recently stated that it plans to buy back an additional $5 billion and the majority of the cash proceeds will go to the shareholders. Yahoo is attempting to increase its shares value. On the other side of the deal, Alibaba is making the purchase using cash that it has on hand, an equity raise and issuing preferred stock. If Alibaba wants to, they can elect to pay entirely in cash instead of in preferred stock.

As a part of the deal, at least $2 billion will be issued by Alibaba as equity to parties not affiliated with the deal. Once the purchase is finalized, Alibaba will retain the right to buy back half of the 20% Yahoo currently owns. This buyout options expires in December of 2015. This expiration date will force the company to go public before that date if they want to exercise the buyback option.