Private Equity Takes Two Approaches To Yahoo!
Private equity firms including KKR and TPG Capital are looking to potentially buy minority stakes of up to 20 per cent in Yahoo! Inc with an eye to eventually taking over the whole company, people with knowledge of the situation said.
These buyout firms have signed confidentiality agreements with Yahoo! and could be willing to team up with its co-founders Jerry Yang and David Filo, who together own 9.5 per cent of the Internet company, according to the sources.
Acquiring a minority stake could give the buyout firms an advantage in taking full control once the leverage finance market opens up, and also provide them with the potential for representation on Yahoo's board, the sources said.
Another group of firms, including Blackstone Group, Providence Equity, Bain Capital and Hellman & Friedman have held out against signing nondisclosure agreements that would restrict their ability to form consortiums with strategic partners such as China's Alibaba Group or Japan's Softbank Corp, they said.
Carlyle Group has also not signed an NDA, sources told Reuters last week.
Yahoo! and the private equity firms declined to comment.
This split in approach comes as bidders jockey for the best position to forge a deal for Yahoo!, the Internet pioneer whose growth has stagnated in recent years due to competition from the likes of Google Inc and Facebook.
Yahoo's strategic review, announced in September when the board fired CEO Carol Bartz, is complicated by the different agendas of players with a say in the situation, including its Asian partners, the co-founders, the board and shareholders.
That has made for slow going, and the deal process and alliances remain fluid. Silver Lake, for instance, which had been a significant holdout over the restrictive terms of the confidentiality agreement, signed the pact, the AllThingsD blog reported on Wednesday.
Yahoo's board has come under attack from two major shareholders. Daniel Loeb of activist hedge fund Third Point LLC said last week he was deeply concerned that Yahoo! is looking at deals that will allow private equity firms to gain substantial equity positions in the company.
Capital Research and Management, Yahoo's top shareholder, is "extremely unhappy" with the way the company is handling sale discussions, a source familiar with the institutional investor's thinking said this week.
A minority investment, such as that being considered by KKR and TPG, could take the form of a private investment in public equity (PIPE) transaction, two of the sources said. PIPE is often used by small and mid-cap firms that have difficulty raising capital in public markets. They typically get stock at a discount to the public market valuation.
It was not clear how a PIPE could be structured in the case of Yahoo!, which has a roughly $20 billion market value.
The plan is for Yahoo! to then take on debt to fund a large share buyback, increasing the stake of these investors to 40 per cent to 45 per cent, Reuters has reported.
That could give Yahoo! time to turn around the company and allow it to form partnerships with social media companies like Facebook, Yelp and Twitter and move into mobile.
"The PE firms who have signed the nondisclosure agreements are seeking a minority stake as a half-step in buying the company while the leverage markets remain closed," said one of the sources close to the situation. "They want to get a pole position and board room presence by owning a big slug of the equity."
The key risk in that strategy is the investor would be betting that Yang and the current management can turn Yahoo! around, the sources said.
Executing a turnaround in a public market, where Yahoo! is bound by shareholder demands and disclosure rules, is another hurdle, according to the people.
"A lot of the PE firms who have not signed NDAs are saying, 'I don't want anything to do with that'," one source said.
Another wrinkle is that this plan would call for Yahoo! to keep its Asian assets, which present growth opportunities and are seen as necessary to finance a large borrowing. But holding on to the Asian assets could face opposition from Alibaba and some Yahoo! shareholders who are keen to monetize the assets.
Alibaba chief Jack Ma has publicly expressed interest in buying all or part of Yahoo! itself.
The Chinese e-commerce giant is discussing various deal structures that would allow it to buy back Yahoo's 40 per cent stake in Alibaba, the sources said.
Alibaba is talking with potential partners -- both trade and private equity buyers -- that would be interested in owning Yahoo's core U.S. business, one of the sources said.