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Analyst slams Softbank Yahoo! and ZD dealings

Claims our old friends at ZD work for a "debt-bloated carcass." Oh dear...

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Internet stocks in general and those owned by Softbank in particular have come under savage fire from veteran US financial commentator Christopher Byron. Writing in his Back of the Envelope column in the NY Observer, Byron describes one such company, Ziff-Davis, as a "total basket case" and a "debt-bloated carcass." Byron is particularly interested in Yahoo! and in the proposed spin-off of ZD's Internet operations via a tracking stock IPO. He draws attention to the fact that Softbank Corporation of Japan owns stock in both ZD and Yahoo!, and suggests that "Ziff-Davis is dying so that Yahoo! might live." ZD IPOed last April, and Byron points out that the company took delivery of over $1.5 billion worth of debt as part of the process, while Softbank picked up a goodly wedge for the shares. "Here at Back of the Envelope," he says, "we took one look at the asset shuffle and predicted the company would soon be flat on its keester." And here it gets more interesting. In July Softbank spent $250 million on Yahoo! shares, and now has 30 per cent of the company. It also spent $400 million on shares in the E-Trade Group. E-Trade has since spent substantially on promotions via Yahoo!. Byron has also uncovered an SEC filing which says that in July-September Yahoo! advertising revenues from "Softbank and its related companies" grew from 4 per cent of net revenues to 8 per cent. Turning the screw further, Byron points out that Yahoo! beat analysts' earnings forecasts by 50 per cent, and that of the difference (5 cents a share), which totalled $5.2 million, $4.3 million was accounted for by that very revenue from Softbank. "Since the gross profit on ad revenues at Yahoo runs to about 90 percent and all the other business costs are pretty much fixed whether the ads come in or not, we may say with some confidence that, were it not for the Softbank revenues, Yahoo's actual third-quarter earnings would have been only 11 cents per share and not 15. The company would have beaten the Street's estimate by a mere penny per share. "That hyped-up trouncing of the Street's consensus forecast, announced on October 7, launched Yahoo's stock on its most explosive price surge ever, from $104 per share to more than $275 per share less than three months later. In fact, of course, nearly 100 percent of the run-up was fuelled by the most egregious sort of related-party transaction: Ad revenues supplied by a 30 percent shareholder of the company." And Ziff, "the debt-bloated carcass that provided the cash?" Byron says that in the company's latest quarterly filing it says that it expects, as of December 31, to be in violation of its loan covenants. Basically, it could end up defaulting. Byron points to the December 22 registration statement for the ZDNet tracking stock IPO, which says ZD intends to use the proceeds to pay off as much debt as possible. He's sceptical that this will work, to say the least: "This business - to be called ZDNet - looks exactly like the one it is being carved out of, only worse… What moron is going to pay anything for that!" Fortunately for Internet stocks everywhere, Byron reckons that the morons who've put their hands up for Web IPOs so far are quite likely to open their wallets yet again. ®

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