The key issue here is to analyze why Cao Guowei, through his investment holding company New-Wave, designed the timeline to buy back and sell off Sina stocks to be around two years. What was the original intention behind such arrangement? How is it related to the business growth of Weibo? When will the remaining 1.8 million shares likely be sold off? Will similar operations happen again in the future? To answer these questions, we need to examine the sources of funding, the share price performance, Cao’s own words about not selling more shares, as well as the latest business strategy adjustments relating to the separation of Sina’s portal business from Weibo. There are also reasonable speculations about potential future funding plans for Weibo’s spinoff.
The margin loan from Merrill Lynch shaped the early share sell-off timeline
New-Wave’s $180 million MBO in 2009 had three funding sources: $50 million from management, $75 million from private equity firms, and a 12-month $58 million margin loan from Merrill Lynch. The 160 million shares sold to Bank of America in September 2010 was to repay this loan when it matured. The 100 million shares sold in December 2010 not only allowed management to cash out and repay loans, but also enabled private equity firms to start exiting when the lock-up period ended, as Sina’s share price had doubled since the MBO.
Goldman Sachs deal enabled private equity investors to realize some gains
The up to 125 million shares sold to Goldman Sachs in June 2011 was, according to Cao Guowei himself, mainly to let some private equity investors who also held Sina shares through New-Wave realize gains. Sina Weibo launched in August 2009, and the MBO closed in late September 2009. In the nearly two years since, Weibo’s rise significantly increased the value of Sina shares indirectly held by private equity investors, presenting reasonable timing for them to cash out gains.
Cao stated he won’t sell remaining Sina shares to maintain control
Despite having reduced holdings to around 4% through transfers to Goldman and Bank of America, this does not actually impact management control of Sina. Cao Guowei was quoted saying he does not plan to sell the remaining Sina shares held by New-Wave. Theoretically management needs to maintain a certain ownership level to preserve influence and signal confidence, otherwise the MBO would lose meaning as well.
Weibo spinoff funding may motivate future share sell-offs
There are reports that Alibaba, Baidu and some private equity firms are in talks to invest in Weibo as it separates from Sina’s portal business. With his dealmaking skills, Cao Guowei is unlikely to give up too much leverage. The funds raised could enter Weibo’s new standalone entity, giving it more bargaining chips in negotiations and ability to operate independently. If Weibo grows successfully as a separate company, it would present opportunities for management and shareholders to cash out.
In summary, while the full $950 million acquisition value for Ele.me reported by the press does not reflect the actual cash consideration paid by Alibaba, it serves as a reasonable valuation benchmark for the company. The share buyback timeline arranged by Cao Guowei for Sina roughly two years following the MBO was primarily driven by repayment needs for the margin loan from Merrill Lynch, as well as providing exit opportunities for private equity investors based on Weibo’s growth. Management will likely not sell significantly more shares to maintain control, but fundraising activities related to the Weibo spinoff could potentially motivate future sell-offs.