Yahoo’s Stock Rises Even More As Alibaba Revises Its Offering Price

In anticipation of the Alibaba IPO, Yahoo stock has risen over 20% in the past month or so.  Given the strong reception to the roadshow, Alibaba managemenet and its bankers have increased and narrowed the planned range of the offering from $60-$66 range to $66-$68 per American Depository Receipt (ADR). Considering the enormous interest in Alibaba’s offering, this revision will add 10% to 3% to Alibaba’s valuation at the lower and higher end of the offer price band. We recently published a note illustrating the upside for Yahoo’s stock price if Alibaba’s ADR were offered at $63. However, the upside for Yahoo!’s (NASDAQ:YHOO) stock price can be considerably higher post price band revision. In this note, we will discuss the potential upside for Yahoo’s stock

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Price Revision Impact On Yahoo’s Valuation

Based on the details disclosed in the updated F-1 filing, the market capitalization of Alibaba would be close to $167 billon (at $68 price point) compared to $154 billion at the midpoint of the earlier band offering (i.e $60-$66 per share). At the current offer price, the pre-tax value of Yahoo’s 22.5% stake in the company work out to around $35.6 billion, which is $2.6 billion higher than the $32.98 billion valuation at $63. Since Yahoo’s amended share repurchase agreement with Alibaba allows it to sell 140 million shares in a qualified IPO, the price band revision translates into $9.52 billion valuation for Yahoo’s shares. While Yahoo plans to distribute 50% of the after tax proceed to shareholders, it will continue to hold on to over 400 million shares, a 16.3% stake that could be worth more than the current value of $26.08 billion (at $68).

Furthermore, according to our calculations, if Alibaba’s ADRs were to be sold at $68 then Yahoo’s cash position would improve by $3.09 billion (on the assumption that the company will pay 35% tax on $9.52 billion and distribute 50% of the proceeds to shareholders as one-time dividend). Based on this calculation, Yahoo’s $35.6 billion stake in Alibaba can result in a 22% upside to our $34.38 stock price estimate. THis is in line with where it trades now.  However, this valuation is prospective based on the initial F-1/A fillings, and the overall valuation of Yahoo is subject to the demand for Alibaba’s stock. Where it will trade once the shares are on the market is to be seen. Therefore, we will adjust the model once we value Alibaba post its IPO.

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