Dream Works Animation’s (DWA) stock jumped 26% Monday on news Japanese internet company Softbank (SFTBF) was in talks to acquire the independent studio for $3.3 billion.
Questions were raised about why Softbank would want to acquire DWA stock, and reports soon popped up suggesting that talks have cooled between the two companies. Ultimately, Softbank might make some kind of deal with DWA, but that’s purely speculative at this point.
However, Softbank is clearly on the hunt for internet-related acquisitions, and DWA won’t be its last target. In fact, SFTBF is probably just getting started given the gains it has made on both its 32% stake in Alibaba (BABA) and 43% (voting shares) of Yahoo Japan (YAHOY).
If I were CEO Masayoshi Son, I would consider the following trio as possible Softbank acquisitions.
Softbank Acquisitions — Yahoo (YHOO)
As its CEO said in the 2014 annual report:
“Softbank is not really a telecommunications company, it is an Internet company and its core business is the Internet. … In the world of PC-centered Internet, infrastructure, service and content, and devices were all completely separate from one another. But in the world of mobile Internet these three aspects need to be merged to a certain degree.”
As of the end of March Softbank’s current leverage was 3.6 times EBITDA. Although just 1.1 times EBITDA in 2012, it has gotten as high as 6.2 times EBITDA (2006) in the past, making a number of large acquisitions entirely possible.
The most obvious acquisition for Softbank is to acquire Yahoo (YHOO), which holds a 16.3% stake in Alibaba, post-IPO. A Softbank-Yahoo combination would own 48.7% of Alibaba. Masayoshi Son is on record that he doesn’t want to sell its stake, believing Alibaba is just getting started.
By acquiring Yahoo, Softbank would save approximately $3 billion in taxes. However, Son might opt for Alibaba to do the deal because the e-commerce company stands to save as much as $20 billion as a result of tax efficiencies, which ultimately would see $6 billion or so land in Softbank’s coffers in the form of future equity income.
Either way there’s a good chance Yahoo ends up among Softbank acquisitions.
Softbank Acquisitions — AOL (AOL)
Activist investor Starboard Value is pushing for Yahoo to combine with AOL (AOL) — a move that could save the two companies $1 billion annually.
To do this, and forgo $16 billion in taxes as a result of its stakes in BABA and Yahoo Japan, Yahoo would have to create a new company that holds the two investments along with an actual operating company of any size or description. Called a reverse Morris Trust, the three assets would then be listed on the NYSE or NASDAQ.
The remainder of Yahoo would then acquire AOL using its shares as currency. As long as YHOO retains control (more than 50% ownership), the merger would be considered a tax-free transaction, effectively shielding Yahoo from any tax liability.
Softbank could do all of this through Yahoo, using the company to get to the real investment gem: AOL.
I like this approach for a couple of reasons: First, I’ve been a big believer in AOL for several years now. Tim Armstrong would definitely make a better CEO than Marissa Mayer. The second is that Yahoo’s future as an operating company doesn’t appear to be a long one — at least not as an independent. Yahoo’s core business would be stronger in the hands of AOL; its investments would be more accurately valued in a second, publicly traded company.
Starboard’s approach is a good one. Softbank would be wise to buy Yahoo and then follow through on the activist’s plan.
Softbank Acquisitions — Third Choice
While an obvious choice given all the DWA rumors is Lions Gate Entertainment (LGF), I’m going to veer slightly off the content path to IAC/Interactive (IACI), Barry Diller’s baby, which is down 5.3% in the past month.
What makes IACI such a great choice among possible Softbank acquisitions?
Because, like Softbank, it has a controlling shareholder (Barry Diller has 43.2% of votes) whose vision for the future reaches beyond the next quarterly report. That said, Diller is 72 years old and likely looking to ease himself out of the business. To that end IACI reorganized its executive structure late last year, moving former CEO Greg Blatt over to Match Group where he’ll serve as Chairman of the new entity. His previous role was eliminated.
RBC Capital Markets believes Diller is looking to spin off Match Group, suggesting “the company has a substantial history of consolidating and spinning of assets, and we think that the online personals category as a whole is an attractive segment.” With IACI’s stock price 18% off its 52-week and 5-year highs, now would be an ideal time to snap up its more than 150 brands and products.
Whether Diller would sell is the million-dollar question. If so, his understanding of the movie and cable businesses would very much come in handy with future acquisitions in the content arena. From a strategic point-of-view purchasing IACI could be just as valuable to Softbank as Yahoo — and perhaps even more so.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
