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KKR, TPG Capital Looking into Yahoo Stake

Reuters reported this weekend that buyout firms including Kohlberg Kravis Roberts & Co. and TPG Capital are mulling the purchase of a minority stake in Yahoo. The firms are reportedly looking to buy stakes of up to 20%. The firms have signed confidentiality agreements with Yahoo.

(Reuters) – Private equity firms, including KKR and Co LP and TPG Capital LP, are looking to potentially buy minority stakes of up to 20 percent 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 co-founders Jerry Yang and David Filo, who together own 9.5 percent 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.

But with many other buyout firms sniffing around Yahoo, as well as tech companies such as China’s Alibaba Group, Microsoft Corp and Google Inc , shareholders say they prefer an outright sale now and think it is time for a management change.

“Usually, it’s three strikes and you’re out. With these guys, they’ve had more than five strikes,” said Ryan Jacob, a portfolio manager at the Jacob Internet Fund, which counts Yahoo among its biggest holdings.

Yahoo owns some of the world’s most popular websites, but its revenue and audience growth has stagnated amid competition from Google, Facebook and others. In 2008, Yahoo’s board turned down a $47.5 billion acquisition offer from Microsoft.

Yahoo shares rose 2.01 percent to close at $16.27 on Friday, valuing the whole company at about $20 billion.

The 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 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.

‘PIPE’ DEAL?

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.

Some buyout firms, including Blackstone Group LP , Providence Equity, Bain Capital and Hellman & Friedman have held out against signing nondisclosure agreements that would hinder their ability to partner with Alibaba or Japan’s Softbank Corp , people familiar with the matter said.

Yahoo and the private equity firms declined to comment.

“We would like to see an open auction. Let everyone engage in a formal bidding process run by the investment bankers,” said Lawrence Haverty, a fund manager with GAMCO investors, which owns Yahoo shares.

Haverty said he could not comment on the minority investment plan, as he has not seen a formal proposal. But he made it clear he had little interest in giving current management any more chances to revive the company’s fortunes.

“It’s time for a change in the leadership and the board,” Haverty said.

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 companies that have difficulty raising capital in public markets. They typically get stock at a discount to the public market valuation.

The plan is for Yahoo to then take on debt to fund a large share buyback, increasing the stake of these investors to 40 percent to 45 percent, Reuters has reported.

That could give Yahoo time to turn around the company and allow it to form partnerships with social media companies such as 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.”

One wrinkle in this plan is that Yahoo would likely 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.

Ryan said he believed a full sale of Yahoo could fetch a 20 percent to 30 percent premium to the current market price and he preferred that to a minority stake sale.

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 percent 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. (By Nadia Damouni and Alexei Oreskovic)