Yahoo Inc plans to spin off its 15% stake in China's Alibaba Group Holding Ltd, responding to pressure to hand over to shareholders its prized e-commerce investment valued at roughly $40 billion.
Shares of Yahoo were up roughly 7% at $51.45 in after-hours trading on Tuesday, following the tax-free spin off announcement and earnings which just beat analysts forecasts even as its revenues slightly lagged estimates.
Shareholders feel that Yahoo and its stake in Alibaba would be worth more separately, so long as the Alibaba shares are not subject to the standard 35% tax rate that would be incurred from selling the shares.
"It's the best possible outcome," said BGC Partners analyst Colin Gillis. “The main point is that the money goes to shareholders, it doesn't get spent on acquisitions. They don't want to fritter it away."
Yahoo’s market value is about $45 billion, while its Alibaba stake alone is worth nearly $40 billion, meaning the current Yahoo share price assigns little value to the core business. Some investors believe the email, Web site and other operations are worth between $7 billion and $8 billion.
While the spin-off will hold tax advantages for Yahoo and will allow it to simplify its structure, it will also ratchet up pressure on Chief Executive Marissa Mayer to strengthen Yahoo's core media and advertising business.
Yahoo's revenue, excluding fees paid to partner websites, declined 1.8% year-on-year in the final three months of 2014 to $1.18 billion, just shy of Wall Street expectations. The average analyst polled by Thomson Reuters I/B/E/S called for adjusted revenue of $1.185 billion.
Yahoo said it earned 30 cents per share in the fourth quarter, excluding certain items, beating by a penny the consensus forecast of analysts polled by Thomson Reuters I/B/E/S.
Yahoo, which is trying to reverse a multi-year decline in revenue, has faced increasing investor pressure more than two years after CEO Mayer took the reins to lead a comeback plan.
Activist investor Starboard said in September that it had acquired a significant stake in Yahoo and urged the company to cut costs, consider a merger with AOL Inc and quickly "monetize" the Asian assets, which exceed the value of Yahoo's actual business.
Yahoo said its board of directors has authorized a plan to spin off the stake, tax-free, into a newly formed independent registered investment company. The stock of the company will be distributed pro-rata to Yahoo shareholders and the transaction is expected to close in the fourth quarter of 2015, Yahoo said.
The new entity will include Yahoo's 384 million shares in Alibaba as well as an unspecified "legacy, ancillary" Yahoo business, the company said.
Bank of America Merrill Lynch, Goldman Sachs & Co and J.P. Morgan Securities are serving as financial advisors on the transaction.
The spinoff of the second-largest stake in Alibaba is not expected to have much impact on the management of the fast-growing e-commerce company, but will be an option for investors who for some reason don't want to buy shares in it directly.
The stake dates from 2005, when Yahoo bought into Alibaba early, paying $1 billion for a 40% stake in a deal credited to the American company's co-founder Jerry Yang.