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How Sina Can Do More To Unlock Weibo Value
China’s Sina is distributing shares in Twitter-like service Weibo to boost its own stock price, but it can afford to do more
By JACKY WONG
Sept. 1, 2016 7:10 a.m. ET
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Charles Chao turns out to be a man of his word.
Mr. Chao, chairman of Chinese web portal company Sina, said last month that he would look into ways to unlock value in the firm “very closely in the near future.” And just three weeks later, he made his move.
Sina said it would distribute a small part of its stake in Weibo, a popular Twitter-like service in China, to its shareholders. The distribution is equivalent to paying a 6.3% special dividend with Weibo shares. The stake in Weibo, considered to be Sina’s crown jewel, will be reduced to 51% from 54% after the distribution.
Management may hope the move helps fix Sina’s underperformance compared with its much-loved subsidiary. Sina is valued less than its stake in Weibo, after the latter has quadrupled in the past year. That means Sina’s investors are essentially ascribing negative value to around 1 billion dollars of net cash, its unprofitable yet still popular web portal service, and its stakes in online karaoke company Tian Ge and online real-estate brokerage Leju. Credit Suisse estimates Sina is trading at around a 25% discount to the sum of its parts.
And Sina can afford to do more. The company owns Weibo’s Class B shares, which have voting rights equivalent to three Class A shares—the type that other investors own and that are being distributed in the transaction. At the extreme, Sina could distribute nearly half of its remaining Weibo stake, but still maintain control.
Sina is unlikely to go that far, but it can certainly do more to help close the valuation gap. And Mr. Chao, the chairman, has the incentive to do so as he has raised his stake in Sina since the end of last year to 17.9%, from 2.5%. After the distribution, he will own just 2% of Weibo.
There is a caveat. Only around 12% of Weibo’s shares are in public hands, as e-commerce giant Alibaba owns a 30.5% stake. The distribution would increase the public float to about 15%. The expansion in the supply of Weibo shares on the market could trigger short-term volatility in the stock, especially after it has gone up so much.
A popular trade among investors has been to go long on Sina, expecting it to increase value somehow, while hedging that bet by shorting Weibo, which is trading at an expensive 44 times next year’s adjusted earnings anyway.
The initial reaction to the distribution, however, was muted. Both Sina’s and Weibo’s shares ended slightly higher Wednesday. Sina may need to pass out more Weibo shares to truly unlock value.
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