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This Buyout Scenario Involving Yahoo Stock, Verizon & Alibaba Is Very Likely

Any acquisition scenario involving Yahoo! Inc. (YHOO) is tricky because of the potential $10 to $12 billion it could have to pay in capital gains tax from its Alibaba Group Holding Ltd (BABA) stock ownership.

This Buyout Scenario Involving Yahoo Stock, Verizon & Alibaba Is Very LikelyThe good news is that there is one scenario involving Verizon Communications Inc. (VZ), YHOO and BABA that makes too much sense to ignore, and would unlock value in Verizon stock, Alibaba stock and Yahoo stock.

What’s The Scenario?

Accountant and tax advisor Robert Willens recently presented a scenario where Verizon buys Yahoo’s core Internet business, Alibaba buys its 384 million shares back from Yahoo, and then the remaining stake in Yahoo Japan and cash forms a new company that rewards investors with a special dividend that unlocks all the big value in Yahoo — all with less than $1 billion owed to Uncle Sam.

Clearly, this would benefit YHOO and Yahoo stock owners, but the key is that Verizon must want that core business and Alibaba must want to buy back its own stock.

Given that Yahoo stock is down 19% this year and is sitting near 52-week lows, it does not appear that Wall Street believes this scenario is likely.

However, Wall Street is wrong.

VZ Wants Yahoo Stock’s Core

In a recent article, I explained to InvestorPlace readers why Verizon would want to acquire Yahoo’s core business. The biggest reason is that it would give Verizon a slew of new Web properties to deliver ads using the technology it acquired from AOL. These include Yahoo! Finance, Yahoo! Mail, Yahoo! Sports, Tumblr and Yahoo’s exclusive video content.

That said, Verizon’s CEO Lowell McAdam already said on CNBC that marrying some of the assets between Yahoo core and AOL would be good for investors, which almost seems like he is warming investors up to the idea. It’s hard to imagine that McAdam sees Yahoo as an asset that is good for investors and can increase the likelihood of success in its big AOL/advertising bet, yet won’t now pursue and ultimately buy the asset.

The big question is, at what price? Many of Wall Street figure $5 billion is a fair price, but thankfully, if the second part of this equation works out, and Yahoo can avoid that big $10-$12 billion tax charge, there is a good chance that VZ can get YHOO core at a big discount. This ultimately bodes well for Verizon stock owners.

Second Part of the Equation: Alibaba Stock

Whether or not Alibaba would be interested in buying back 384 million of its own shares is the big question to many. However, Alibaba knows a good investment when it sees one, and the opportunity to buy back its own stock near an all-time low valuation is just too good of an opportunity to ignore.

Furthermore, Alibaba sees value in buying back its own stock, and not only could it likely acquire a 15% stake in its own company at a discount, but it could do so and retire those shares. Thus, it would drive the company’s EPS significantly higher, create buying pressure in Alibaba stock and cause a fury of analyst upgrades.

For those who still are not convinced, check out Alibaba’s recent stock buyback activity, and read the reasons why BABA could launch a buyback program north of $30 billion!

There’s Enough Value to Go Around

Yahoo’s stake in BABA is worth over $23 billion, its stake in Yahoo Japan is worth more than $9 billion, the core business is valued at $5 billion, and YHOO has more than $7 billion in cash and short-term investments. This collective value of $44 billion well exceeds Yahoo’s market cap of $27 billion.

As a result, there is a ton of value to unlock in Yahoo.

While I always thought that value would come in the form of Yahoo stock gains, it is more likely the upside comes in the form of a discounted Yahoo core acquisition, discounted BABA stock purchase and $10 billion in tax savings for three different companies.

Verizon stock will gain behind the increased opportunities for AOL and advertising, BABA will gain behind the improved sentiment and accelerated EPS growth and Yahoo will gain as the worth in the sum of its parts are finally realized.

In the end, this is a scenario that benefits all three companies, and is very likely to occur.

As of this writing, Brian Nichols owns shares of Alibaba stock.

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