(Updates shares in 11th paragraph.)
July 16 (Bloomberg) -- Yahoo! Inc. will return at least half of the cash it reaps from Alibaba Group Holding Ltd.’s initial public offering to shareholders, providing solace to investors who’ve hung on as Chief Executive Officer Marissa Mayer struggles to revive sales.
The U.S. Web portal is also keeping a bigger stake in the Chinese e-commerce company, ensuring that Yahoo continues to benefit from its investment in the world’s largest Internet market. The plans for Alibaba were a bright spot in a report yesterday that showed Yahoo’s sales fell last quarter, missing analysts’ projections. The stock slipped as much as 5.3 percent.
Yahoo’s nine-year part-ownership of Alibaba has given Mayer breathing space to turn around Yahoo, with the stock more than doubling since she took over the Sunnyvale, California-based company in July 2012. So far, the former Google Inc. executive has failed to narrow Yahoo’s widening gap with Google and Facebook Inc. or produce much sales and profit growth.
“Alibaba steals the show again,” said Brian Wieser, an analyst at Pivotal Research Group LLC, who rates the stock a hold. “It’s the dominant moving piece in Yahoo’s valuation.”
The Web portal will now sell 140 million shares at Alibaba’s market debut, down from an originally planned 208 million, Ken Goldman, Yahoo’s chief financial officer, said in a statement yesterday. Alibaba has been valued at $168 billion, according to analyst estimates, and its IPO may be the largest in U.S history. Yahoo has a stake of about 23 percent.
“This should be good for the IPO as it shows Yahoo thinks keeping Alibaba’s shares will boost its own valuation,” said Yao Yue, a Shenzhen-based analyst with Morningstar Inc. who values Alibaba at $220 billion.
Alibaba and its backers are likely to account for more of the Chinese company’s IPO, people with knowledge of the matter said. The e-commerce company and its other investors can make up the difference by increasing the amount they plan to sell, the people said, asking not to be identified discussing private information.
The size of the IPO and valuation are still under discussion, and once the price range and share count are decided, Alibaba and its current shareholders will determine how much they will sell, the people said.
Yahoo’s sales, excluding revenue shared with partner websites, was $1.04 billion in the second quarter, missing analysts’ average estimate of $1.09 billion, according to data compiled by Bloomberg. Profit, excluding items such as stock- based compensation, was 37 cents a share. Analysts had projected 38 cents a share.
“The metrics from the core business are underwhelming -- they’re not showing improvement,” said Colin Gillis, an analyst at BGC Partners. “It’s not a good result.”
Yahoo shares declined 4.8 percent to $33.91 at 12:07 p.m. in New York after earlier falling to $33.72. The stock has dropped about 16 percent this year.
Earnings from Yahoo’s stakes in Alibaba and Yahoo Japan Corp. were $256 million during the second quarter, following a $301 million boost in the first quarter.
“The big headwind is competition,” said Sameet Sinha, an analyst at B. Riley & Co. who has a buy rating on Yahoo’s stock. “The Facebooks and Googles are getting that much further ahead.”
Net income attributable to Yahoo was $269.7 million in the second quarter, down from $331.2 million a year ago.
“We are committed to return at least half of the after-tax IPO proceeds to shareholders, in line with our overarching commitment to maximizing shareholder value through prudent capital allocation,” Goldman said in the statement. Yahoo’s initial sale of Alibaba shares will be fully taxed, and the company will seek ways to reduce how much it must pay in the future, Goldman said on a conference call.
The Chinese company’s rapid growth has made it one of the most anticipated IPOs since Facebook in 2012 and Twitter Inc.’s last year. The conference call will probably be the last before Alibaba’s IPO, Mayer said.
Mayer has been investing in Yahoo, seeking to attract more users that should, in turn, attract more advertising dollars. That includes new mobile services focused on specific topics such as food, beauty and technology. The company has also redesigned its home page and acquired Tumblr, a blogging service that helps draw younger users to Yahoo.
Yahoo’s display ad sales fell 7 percent from a year earlier, compared with a 2 percent increase in the first quarter. The price-per-ad dropped 24 percent.
The display business is struggling after a product transition took longer than expected -- and as premium advertisers stepped back on their spending, Mayer said on the call.
“Given our top priority of long-term sustainable growth, we are not satisfied with our results this past quarter,” Mayer said.
Mayer needs to show her many efforts at Yahoo are actually producing more traffic -- and time spent on sites, said Martin Pyykkonen, an analyst at Rosenblatt Securities Inc.
“The advertisers are only going to come back and spend in a meaningful way when there’s an audience -- and when there’s growth in that audience,” he said.
--With assistance from Leslie Picker in New York and Lulu Yilun Chen in Hong Kong.