Why Yahoo’s stakes in Alibaba and Yahoo Japan have been lucrative


Feb. 6 2014, Published 8:47 p.m. ET

Yahoo’s Alibaba and Yahoo Japan stakes

Yahoo’s top line has seen a downtrend, but the stock has steadily risen last year—mainly due to the growing value of its 24% stake in privately held Chinese e-commerce company Alibaba and its 35% stake in Yahoo Japan. Yahoo’s stakes in both Alibaba and Yahoo Japan added about $222 million to the Internet company’s bottom line in 4Q, up 49% year-over -year.

A number of investors have invested in Yahoo to seek exposure to Alibaba. According to Yahoo’s 4Q earnings presentation, Alibaba posted nearly $1.8 billion in 3Q 2013, a 51% increase year-over-year. The company saw an $801 million profit, from a $246 million loss during the same period last year due to a $550 million payment to Yahoo tied to intellectual property agreements. Alibaba, which dominates the e-commerce market in China, is slated to launch an IPO this year. Analysts have valued Alibaba at more than $100 billion and expect the e-commerce platform to raise up to $15 billion via its IPO.

Article continues below advertisement

Yahoo had acquired a 40% stake in Alibaba for about $1 billion in 2005 and sold a part of the stake in September 2012 for $7.1 billion. Under the terms of a May 2012 shareholder agreement, Yahoo will sell half of its shares in Alibaba if an IPO takes place before December 31, 2015. Alibaba can choose whether to buy the shares or have Yahoo sell them in the offering. Yahoo stated in its 3Q financial report that it will sell 208 million of its 523.6 million shares in Alibaba instead of the agreed 261.5 million. Following the IPO, Yahoo has the right to sell its remaining Alibaba shares at its discretion—but only after a one-year lock-up period.

Yahoo Japan is one of the largest Internet companies in Japan and is a joint venture between SoftBank (42%) and Yahoo (35%), with the remaining shares in free float. For 3Q 2014, the listed Internet company posted 9% year-over-year growth in revenues to ¥96.8 billion ($967 million). But operating income declined by 1.5%, to ¥49.2 billion ($480 million) due to the implementation of new strategies for its shopping division. During the quarter, the company saw an increase in mobile ad revenues, which accounts for 22% of total ad revenues. In terms of profits, the introduction of new strategies for the e-commerce business in October 2013 eliminated store tenant and other fees in the third quarter, leading to revenue decline in the company’s search and listings ads division and online shopping and auction division. Plus, an increase of sales promotion costs attributable to aggressive promotion activities led to a slight decline in profits compared to 3Q 2012.

There were reports of Yahoo looking to sell its stakes in Alibaba and Yahoo Japan to their majority owners in a complicated deal back in 2011. But the issue of Yahoo taking a huge tax hit on the sale led to discussion of tax-free options, including an asset swap or a tracking stock. However, no agreement was reached on the deal.


More From Market Realist