In a shocking turn of events, Yahoo (YHOO) has decided not to spin off the 384 million shares of Alibaba (BABA) that it owns.
Over the past few days there have been rumors and speculation about every imaginable possibility, including YHOO selling or spinning off its core internet assets.
The company pretty much insists that, right now, it has no plans, and is reviewing all options. YHOO’s Chairman recently said that there is no determination by the company to sell itself or any part of its business.
He went on to acknowledge that Yahoo stock is undervalued, and it is management’s goal to unlock that value.
This is great news for Yahoo stock owners. While analysts and investors are scrambling to figure out what the news means for the future of Yahoo, the good news is that it doesn’t really matter what Yahoo divests. As long as Yahoo divests something, investors will be rewarded.
There’s a Lot of Value to Unlock
YHOO’s 384 million share stake in BABA is worth every penny of its $32 billion market capitalization. Therefore, based on YHOO’s current stock price, everything except BABA is worthless.
The problem is that YHOO has assets that are extremely valuable. It has a 35% ownership stake in Yahoo! Japan that was recently valued at $9 billion if divested, spun off or otherwise sold.
YHOO also has $7 billion in cash & equivalents, and of course, it has core operations that SunTrust recently valued at $6 billion to $8 billion. Given that Yahoo has nearly $5 billion in trailing 12-month revenue, SunTrust’s analysis is probably right on.
What YHOO Must Do Is Very Simple
In other words, YHOO has total assets that are worth $55 billion piled into a $32 billion company. The $23 billion question is … how Yahoo can actually unlock that value?
First, YHOO must spin off some assets. If YHOO were to spin off its Yahoo Japan stake, $9 billion of its market capitalization would be allocated to that new entity. As a result, whatever Yahoo chooses to spin off, whether it be Yahoo Japan, Yahoo’s core business, or even part of its BABA stake, the spinoff will have a fair valuation attached to it.
Second, YHOO must divest and sell what it does not spin off. Right now, the only asset owned by Yahoo that actually creates profits and revenue is its core operations. Its other assets, valued at $48 billion, are sitting stagnant, and are doing nothing to create shareholder value.
Therefore, YHOO must find a way to either sell part or all of its Yahoo Japan or BABA stakes in exchange for cash. Ideally, Alibaba or Softbank would buy a large portion of what YHOO owns in BABA, but if not, Yahoo should have no problem getting face value.
YHOO Must Put Its Cash to Work
For the sake of argument, let’s assume that YHOO spins off its Yahoo Japan stake at a $9 billion valuation. That would leave a $23 billion valuation for everything else. YHOO could sell its stake in BABA, pay taxes, and the proceeds alone would equal $23 billion. Therefore, Yahoo would have $30 billion in cash along with a $7 billion core internet business all pilled into a $23 billion company.
YHOO could pay a special dividend, or it could launch one of the largest stock buyback programs (relative to market cap) in history. That would create shareholder value, driving Yahoo stock price higher as the company bought back its own stock at an unprecedented rate.
Regardless of which path YHOO decides to pursue, the bottom line is that Yahoo needs to find a way to spin off some assets, cash-in on the rest, and then put cash to work in order to unlock the value in Yahoo stock.
What YHOO divests doesn’t really matter. It all comes down to cashing in, regardless of how YHOO has to do it. So long as Yahoo acts quickly and doesn’t force investors to wait another year, YHOO will appreciate to reflect the clear value that lies within its stock.
As of this writing, Brian Nichols was long Yahoo.
