November 15, 2011 10:32 am

Alibaba driving ‘fluid’ Yahoo process

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Alibaba Group is driving talks with parties interested in a deal with Yahoo (NASDAQ:YHOO), two sources following the situation told dealReporter.

The first source described the process as fluid, adding that he is unaware of any deadlines having been set for bids or expressions of interest. The second source said he expects the deal will take weeks, or even months, to play out as parties test scenarios with different partners and wrangle over valuations and financing arrangements. Yahoo did not respond to a request for comment.

One of the sources said suitors are approaching Yahoo as though a potential transaction would be a full-scale takeover.

This week, Bloomberg News reported that Alibaba Group and Softbank were working together and in talks with private equity firms about an outright acquisition of Yahoo. Additional reports said Silver Lake Partners signed a non-disclosure agreement (NDA) with Yahoo, joining TPG Capital and KKR. Providence Equity Partners, Bain Capital, Blackstone and Hellman & Friedman are still holding out, the report noted.

Neither of the sources could confirm whether TPG signed an NDA, although both questioned if the financial sponsor had done so. TPG declined comment.

Yahoo’s financial advisor, Goldman Sachs, is trying to get as many parties under the “NDA tent” as possible and will be trying to engineer a “forcing event” that brings potential buyers to the table, according to the second source. The same source said that at this point, many private equity firms want to keep their options open.

The first source said it was his understanding that Softbank is not Alibaba’s primary partner, noting that discussions between a wide number of parties are still ongoing. Deal talks revolve around Alibaba as it may be the most likely strategic to support the leverage needed to for a Yahoo take-private, the second source said, adding that the Chinese internet company continues to talk to a number of different partners.

Financial sponsors cannot raise enough capital to buy Yahoo in its entirety without a corporate partner, the second source said. Suitors are trying to be as collaborative as possible, presenting different tax-efficient deal structures, he noted.

At least some US parties are “leery” of Alibaba playing more than just a small role in a potential deal. Alibaba CEO Jack Ma and CFO Joe Tsai are not known for playing minor roles in companies, the second source cautioned. “I think everyone realizes Alibaba gets to make that decision,” he said.

Whether Alibaba will follow through with its stated intention to buy Yahoo remains to be seen, Asia-based industry sources said. These sources said they were doubtful Alibaba would be able to complete an acquisition of Yahoo because of challenges around valuation and their perception that the US government would likely raise opposition to such a deal.

Microsoft (NASDAQ: MSFT), meanwhile, will wait until a potential Yahoo deal advances to decide whether it will play a part in an agreement, the second source said. For the time being, the Washington-based software giant is keeping informed on how the situation is unfolding and is speaking with multiple parties, said the same source, underscoring that it is not playing a catalyst role at this point.

Valuation is expected to be intensely debated, said a third source following the situation. Talks between Alibaba’s Ma, Silver Lake and Yahoo have stalled in the past because of serious differences in valuation, with Ma wanting to pay significantly less for shares in Alibaba than Yahoo would like, this source noted.

Alibaba’s USD 1.6bn sale of a 5% stake in September to an investment group that included Russia’s DST Global, Singapore-based Temasek, and US-based Silver Lake placed a USD 32bn valuation on the Alibaba Group.

If Yahoo were to consider selling its 40% Alibaba stake back to the Chinese company, it is natural that Alibaba would demand a discount on the stock based on the size of the block of shares, the second source said.

As an alternative to a full sale, Yahoo could consider a leveraged recapitalization. But according to two of the sources and one large Yahoo shareholder this option is far down the list of potential scenarios.

Despite the lack of enthusiasm for this option, private equity firms are working directly with Yahoo’s advisors and board of directors for consideration in a leveraged recapitalization, said the second source. While this would give financial sponsors some sway in decisions regarding a potential sale of Yahoo’s Alibaba and Softbank stakes, it would not allow them to control the company or affect decisions, the second source said.

A concern with this leveraged recapitalization deal structure is that private equity funds have to get comfortable with a minority stake and align their interests with Yahoo founder Jerry Yang, said an industry source following the situation and the shareholder.

According to the shareholder, the leveraged recap essentially transfers the ownership of an underperforming asset at a depressed valuation to a private equity firm, thereby handing the financial sponsor all its upside. As such, he said there is not much incentive for Yahoo investors to support this kind of transaction.

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