News Corp. approached about Yahoo buy

Private equity firms eye alternatives to AOL deal.

NEW YORK -- As Yahoo shareholders cheer a possible sale of the company to private equity firms, perhaps with the aid of AOL, private equity players also have approached News Corp. as a potential strategic partner, according to sources.

News Corp.'s role would not be surprising. Thanks to its digital business, led by the struggling social network MySpace, Rupert Murdoch's conglomerate has been cited as a potential merger partner for Yahoo or even AOL and has been in early talks as Web players have looked to strengthen their position vis-a-vis the dominant Google.

Private equity firms have pitched News Corp. with suggestions that it could roll some or all of its digital business into Yahoo in return for a stake, one source said. Given that MySpace has lost user and advertising momentum since News Corp. acquired it in 2005, it is often seen as a candidate for a combination with another Web player.

However, observers expect that AOL, led by chairman and CEO Tim Armstrong, will be more actively interested in doing a deal.

The News Corp. talks -- as those with AOL -- are in preliminary stages, one source said.

Silver Lake Partners and Blackstone Group are among the private equity firms kicking the Yahoo tires.

Driving them are a lack of major growth catalysts for Yahoo shares; recent executive departures that some have taken as a sign of frustration with CEO Carol Bartz; and the "availability of two high-profile Internet CEOs, Jon Miller and Tim Armstrong," said Jordan Rohan, an analyst at Stifel, Nicolaus.

News Corp. chief digital officer Miller once ran AOL.

Some on Wall Street also think that Microsoft, which already has a search deal with Yahoo, should jump into the fray. "I think Microsoft has to act," Gamco Investors portfolio manager Larry Haverty said.

In February 2008, Microsoft made an unsolicited bid of $44.6 billion, or $31 per share, for Yahoo. The cash and stock proposal, which was seen as an effort by Microsoft to hold serve against Google, was rejected by Yahoo's board.

Yahoo shares jumped as much as 9.9% Thursday amid investor hopes for a sale, closing up 4.5% at $15.93 for a market capitalization of $21.5 billion.

Jefferies & Co. analyst Youssef Squali said talk of a Yahoo sale is "resonating with investors given elevated levels of frustration with the status quo."

While Bartz has tried to energize the Web company, Yahoo had 128 million unique visitors in September, down 4.4% from September 2009, before Bartz took over early this year.

"Yahoo remains an asset/cash rich business, the value of which will ultimately have to be captured through some tough decisions at the board level," Squali said. "Going private would allow for the tough choices necessary for a turnaround without the scrutiny of public markets."

He estimated that the sum of Yahoo's various parts are worth $20-$23 per share, but about 60% of it is locked up in cash and its Asian holdings, particularly its 29% stake in Chinese e-commerce firm Alibaba and its 34% stake in Yahoo Japan.

Squali calculated that the enterprise value of those two parts could amount to more than $10.4 billion, compared with $14.2 billion for Yahoo's core business.

He suggested Yahoo could sell some or all of its Asian stakes to fend off suitors. "Until management shows a willingness to monetize them, investors will look favorably upon a financial buyer's interest," Squali said.

But a sale of the struggling Yahoo is still a complicated proposition, and PE firms are believed to have pitched complex structures. AOL, for example, has discussed a possible reverse merger with Yahoo with PE players, which would see Yahoo, whose market capitalization is more than eight times that of AOL's, buy the smaller AOL, while the latter's management would run the show.

Because of the complexity and apparent opposition of Yahoo's leadership, Miller Tabak analyst David Joyce said a sale is "a long shot for now."

And Rohan said: "While there are many things that have changed that make a potential Yahoo buyout more likely to happen today, there are a couple of big factors that make the potential buyout a low probability event, in our view. Those factors [include] the lack of availability of financing for a full $30 billion takeout, which would simplify the takeout process significantly."

That is also why PE firms would like to partner with a media or online firm to reduce their cost.

Meanwhile, Reuters reported that Yahoo has hired Goldman Sachs to help it defend against advances from PE firms.

News Corp., AOL and Yahoo all declined comment.

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