Alibaba IPO Could Hit Yahoo! Revenue Growth

NEW YORK (TheStreet) - Alibaba's prospective initial public offering could be a bonanza for Yahoo! (YHOO), an over 22% investor in the Chinese e-commerce giant. However, the offering could also hit Yahoo!'s top-line revenue, which fell 1% in 2013 when excluding traffic acquisition costs.

The revenue hit, something that hasn't been discussed much as Yahoo! investors handicap the company's ultimate Alibaba payout, will become evident after the IPO is complete.

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When Yahoo first invested in Alibaba in 2005, both companies entered a technology and intellectual property license agreement, known as TIPLA, which stipulated Alibaba would pay Yahoo a percentage of its total revenue.

Between 2006 and 2012, Yahoo received a 2% royalty equivalent to 2% of Alibaba's consolidated revenues less some costs. The TIPLA was amended at the end of 2012 so that Alibaba paid Yahoo! a $550 million lump sum and reduced its annual royalty to just 1.5% of consolidated revenue.

Under the TILPA, Yahoo received $95 million and $93 million in royalty fees from Alibaba in 2012 and 2013, or about 4% of the company's overall revenue for those years. Yahoo!'s annual 10-k filing with the Securities and Exchange Commission indicates the company booked in excess of $100 million in TILPA-related fees last year.

Those fees, however, will vanish from Yahoo! earnings just as the company receives a payout for any Alibaba shares the company sells in the IPO. Upon completion of Alibaba's IPO, the company will no longer be required to pay Yahoo! TILPA-related fees. "No royalties will be payable thereafter," Alibaba states in its IPO prospectus.

Alibaba-related fees are disclosed as 'other revenue' in Yahoo!'s results. While the end of those fees are a minor problem for Yahoo! given far larger gains the company is likely to record on its share sale, it could prove a meaningful number for investors.

Yahoo! has struggled to increase revenue in recent years amid challenges to the online display ad market and a general shift away from web portals towards mobile devices and social networks. In the first quarter of 2014, Yahoo was able to reverse its 2013 revenue declines, posting a 1% rise in revenue ex-TAC. Without Alibaba fees, it's unlikely Yahoo!'s revenue would have risen.

Bank of America Merrill Lynch analysts noted the cessation of Alibaba royalty fees in a May 7 client note assessing the impact of Alibaba's IPO filing on Yahoo!'s valuation. "Per the agreement (TIPLA) signed in Sept. 2012, upon the completion of the IPO, Alibaba will no longer pay royalty fees to Yahoo," Bank of America wrote.

Nevertheless, Bank of America analysts maintain a 'buy' rating for Yahoo! and value the company at $52 a share if Alibaba IPO's reaches a $210 billion valuation and $33 a share at a $130 billion valuation for its public offering.

Those analysts also noted that Yahoo! may have seen its stake diluted slightly in the first quarter. "Biggest negative of the filing may be that Yahoo's ownership appears to have been diluted a bit and now stands at about 22.6% (Alibaba value to Yahoo may need to be adjusted by -6%)," Bank of America wrote.

Alibaba said in its prospectus Yahoo! is still expected to sell 208 million shares of Alibaba in the company's offering. The deal likely will generate a significant tax bill for Yahoo!, analysts at Bank of America wrote.

Alibaba's F-1 pegged its fair value at $50 a share as of April 2014. Given the company's disclosure of 2.32 billion total outstanding shares, that fair value implies a valuation of about $120 billion.

Marissa Mayer's Alibaba Quiet Period

Yahoo! CEO Marissa Mayer declined to comment on Wednesday, citing a pre-IPO quiet period, when asked about Alibaba's IPO at a Techcrunch forum.

As TheStreet reported, Jacqueline D. Reses, a Chief Development Officer at Yahoo! and an Alibaba board director, will resign from the company's board of directors immediately upon the effectiveness of the its share offering.

Yahoo! shares fell over 6% to $34.25 in Wednesday trading. Shares in the company have fallen over 15% year-to-date.

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-- Written by Antoine Gara in New York

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