The Alibaba stake
In his Fourth Quarter 2011 Investor Letter, Loeb explained why he thinks Yahoo! is a great opportunity for Third Point and what he’s trying to do in order to unlock its value.
In an article named The Taobao Phenomenon (really worth reading), the Boston Consulting Group states that “More products were purchased on Taobao (n.d.r the B2C part of Alibaba) in 2010 than at China’s top-five brick-and-mortar retailers combined, making it the biggest retailer in China.”
In Loeb’s view, people are flocking to Taobao site (instead of classic brick-and-mortar malls) mainly because:
· They find on it a broad assortment of products.
· Often the products are being offered at lower prices.
· The goods have a fixed price (where haggling has been the common practice for a long time).
· Brick and mortar chains cannot reach every place in a so big country.
Dan Loeb’s Fight
The relationship between Loeb and Yahoo! is a typical case of a love-hate relationship.
Loeb is renowned in the investment community for his letters in which he tries to “push” the management of a company belonging to his portfolio to put in place the right actions that could enhance shareholder value.
Of course, the greater the stake in the company, the louder the advices of this tenacious activist shareholder.
Mr. Loeb doesn’t want to sit and wait for things to magically improve by themselves, but is trying to catalyze these improvements by proposing people (as directors) and actions to Yahoo’s board.
In his December 13 letter, for example, he solicited Yahoo management to publicly disclose (with an SEC 8-K form) the “Process Letters” in which the board was inviting third parties to make (previously announced) proposals for the acquisition of a small part or of the whole company, in order to understand if they were written in the best interest of YHOO shareholders.
In 2008, when Jerry Yang (one of the founders of the company) was CEO, Yahoo rejected an unsolicited takeover bid from Microsoft (MSFT) worth about $44 billion, and shareholders didn’t appreciate this move (YHOO is currently trading around $18 billion).
As a consequence of this (and many other) kind of pressures, Jerry Yang last January 17 resigned and was replaced by Scott Thompson.
In February, Third Point announced that they were planning to propose four new directors (including Loeb himself) for the Yahoo board, and the proxy battle is still in progress, with Yahoo initially refusing to accept them and, at the end of March, willing to accept just one of them (but not Loeb).
We’ll see how the battle will unfold but we can say that, thanks to Dan Loeb and Third Point, everyone is now trying (for one reason or another) to enhance shareholder value at Yahoo.
As it was becoming very difficult to keep track of everything, a few days ago Loeb launched a new site, so we can follow the evolution of this story without missing anything. You can find the site here.
In order to put a price on YHOO, Loeb refers to a November 2011 report from UBS’s Makio Inui, who valued Alibaba Group at $63 billion. With its 40% stake, the Alibaba piece only would be worth around $13 per Yahoo! share (after-tax), not so distant from the current price.
A few months ago, it was valued at around $7.60 per share when some private equity firms bought a 5% stake in Alibaba Group, so this means that Alibaba perceived value is growing very fast.
If Loeb’s projections turn out to be true, the market's current valuation is practically taking into account the only Alibaba part of the pie, without considering the core-business contributions, that is, the U.S. and Yahoo Japan digital content and advertising business.
In Loeb’s view, the investment community is focusing its attention only on the tempestuous relationship between Mr. Ma, the Alibaba founder, and Yahoo’s management.
Anyway, he shares with Mr. Ma the belief that Yahoo’s Alibaba stake is very valuable (Mr. Ma tried to buy back some of the 40% stake in Alibaba Group last October, but ex-CEO Carol Bartz opposed). He still wants to do it, and currently we only know that, as time goes by, he will probably have to pay a big premium in order to have it back.
Just to get an idea of what a company like Yahoo is worth (excluding the Alibaba contribution), we could think at the price Microsoft has just paid for 800 of its patents (plus a non-exclusive license of the remaining 300): That’s an astonishing $1 billion!
Yahoo is a pioneer of digital content business and web technologies, and I think its patent portfolio is richer than AOL’s.
So here we have a company trading around the value of one of its parts (the growing Alibaba Group stake), with a good chance to unlock its core-business value.
At these prices, Mr. Loeb sees good downside protection and really big potential profits.