E-COMMERCE: Alibaba Raises More Cash, Yahoo Stake in Sight?

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Bottom line: Alibaba’s latest $4 billion fund-raising could signal a potential deal to buy its shares currently held by Yahoo, as both companies look to remove a distracting issue that is affecting both of their stock prices.

Alibaba eyeing Yahoo stake?

Chinese e-commerce giant Alibaba (NYSE: BABA) just can’t seem to get enough money. Despite having more than $18 billion in its coffers at the end of last year and access to billions more in credit, the company is reportedly back in talks with a group of banks to raise another $4 billion. That raises the question of why exactly it needs all this money.

Alibaba has certainly been an aggressive acquirer over the last 2 years, spending billions on a wide range of companies in industries from entertainment, to hired car and social networking services and many others. Two weeks ago the company was in yet another major M&A headline, when it disclosed it had quietly purchased more than 5 percent of faded group buying giant Groupon (Nasdaq: GRPN) in the open market. (previous post)

That led me to speculate that perhaps Alibaba might make a bid for a larger stake of Groupon, or possibly the entire company, as part of its recent push into online-to-offline (O2O) services. But even after Groupon’s stock has nearly doubled since news of the Alibaba investment first appeared, the group buying pioneer’s market value is still just $2.6 billion, an amount that would be easily affordable for Alibaba using its current resources.

All of that brings us to an intriguing alternate explanation, namely that perhaps the company might be preparing a bid for the huge stake of itself that is currently owned by former partner Yahoo (Nasdaq: YHOO). That stake was valued at around $30 billion last time it was in major headlines back in December.

But since then the price of Alibaba’s New York-listed stock has come steadily downward, largely in tandem with China’s sinking domestic stock markets. At the stock’s current levels the Yahoo stake would now be worth about $24 billion, which isn’t too far from how much cash Alibaba would have in its coffers if it secures this major new loan.

According to the latest reports, Alibaba is in talks with a consortium of at least 8 banks for the loan, which could be worth up to $4 billion. (English article). There’s not much additional detail in the reports, which only say the group will begin marketing the loan to other banks this week. The amount will start at around $3 billion, but could reach up to $4 billion or even higher if demand is strong, the reports say.

Funding for Acquistions?

The reports don’t talk very much about why such a cash-rich company like Alibaba would need this additional money, except to give the usual explanation about future acquisitions. One report cites an analyst saying that Alibaba could spend as much as $38 billion on acquisitions this year, as it vies with hometown rivals Tencent (HKEx: 700) and Baidu (Nasdaq: BIDU) to build up products and services outside its core area of e-commerce.

While more mega-acquisitions are certainly a possibility and maybe even probable, a buyout of its shares now held by Yahoo could also be a possibility and certainly looks intriguing. Yahoo got the stake as part of a purchase of 40 percent of Alibaba back in 2005 as part of a massive tie-up that never really produced any strategic value for either company. Yahoo later sold off a big portion of the shares during Alibaba’s 2014 blockbuster IPO, but still retained a significant stake.

That remaining stake has become the source of constant headlines that have become a big distraction for Alibaba, and may also be weighing on the company’s stock price. Yahoo was originally planning to spin off the shares into a separate company, but late last year changed its mind due to a potential tax liability from such a spin-off.

As Yahoo’s own original search business fades, investors are paying more attention to its Alibaba stake than the company itself. Yahoo’s board would probably like to get rid of such attention as it works to rebuild the company. Alibaba also probably wouldn’t mind if this distracting issue were also to disappear.

All of that brings us back to whether or not Alibaba might seriously consider using its huge financial resources, including this new $4 billion loan, to launch a bid for the Yahoo stake. Such a move wouldn’t cost Alibaba too much in the end, since it could quickly make back the money by selling some of the shares into its New York listing, and by selling others to big institutional investors. At the end of the day, I would probably put the chances for such a deal at less than 50 percent, but still do think it looks like an interesting alternative to all the usual talk of acquisitions.

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