It’s official — Yahoo! Inc. (YHOO) is putting its core business up for sale, announcing on Friday it had directed its independent board members to move forward with the plan. It has also hired advisers including Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) to consult with them throughout the sale process.
As for what such a sale would mean for Yahoo, or where such a sale could push the value of YHOO stock, that isn’t quite clear yet.
What is quite clear, however, is that this whole thing is apt to be ugly, and is apt to leave someone less than thrilled once all is said and done.
Crunching the Numbers
Truth be told, this moment became inevitable a year ago. Having been at the helm for three years as of July of 2015 and with nothing of significance to show for it — Alibaba Group Holding Ltd (BABA) was already there when Mayer was hired in mid-2012 — a growing lack of faith in the company’s direction as well as a mass exodus of much its top talent translated into new 52-week lows for YHOO stock by the third quarter of last year.
As it turns out, Wall Street wasn’t wrong to have doubts, nor were those executives wrong to jump ship.
That became evident as of the most recent quarterly filing, in which Yahoo announced it was imposing a $4.46 billion write-down on … well, here’s what the company said:
“We concluded that the carrying value of our U.S. & Canada, Europe, Latin America and Tumblr reporting units exceeded their respective estimated fair values. The goodwill impairment resulted from a combination of factors, including decreases in our market capitalization, projected operating results and estimated future cash flows.”
The “U.S. & Canada, Europe, Latin America and Tumblr reporting units” are more or less the whole company. Left out of the mix is the aforementioned Alibaba Group Holding, which one way or another is going to be separated from Yahoo’s legacy, “core” business, and Yahoo Japan.
That’s a $4.46 billion write-down for a $28.8 billion company that’s only generated $4.97 billion worth of revenue over the course of the past four quarters, and only managed to turn an operating profit of a few hundred thousand bucks during that time.
Maybe the people who’ve been arguing YHOO stock is worth nothing without Alibaba were on to something. Then again, maybe their pessimism is overdone. Taking the value of Alibaba and the company’s portion of Yahoo Japan out of the market cap, and the remainder of Yahoo’s street value is on the order of -$15 billion, give or take.
The Critics Aren’t Wrong, But…
While the premise of a stock worth absolutely nothing makes for riveting headlines, it raises questions. Namely, if Yahoo does indeed sell its core business, what might that mean for the value of YHOO stock?
Nobody really knows. But, the name and yahoo.com URL alone has to be worth billions, right?
This has been Starboard Value’s point since 2014. That is, the current value of YHOO shares suggests the company’s core business — its fully owned and fully operated websites — is worthless or is practically worthless, and has been for a few years now. In order to unlock this pent-up value, Mayer would need to split the company up into pieces and let Yahoo’s current core operation be valued as a stand-alone venture and reflect, if nothing else, the value of the iconic name.
The rub: Someone, somewhere along the way, is going to have to pay a massive tax bill for the company’s units to split apart.
The tax liability in the sale/split of its stake in Alibaba was estimated to be on the order of $10 billion to $12 billion. It’s that liability, in fact, that prompted Mayer and the board of directors to nix that plan and look for a different way of splitting the companies’ units into different stand-alone pieces. The funny thing about taxes though — you can divert them, delay them, displace them and move them around, but you can never avoid them, unless…
It’s complicated, but if Yahoo could find a buyer for its core business AND if Alibaba buys back the stake of its company currently owned by Yahoo, that could whittle the tax bill down to less than $1 billion.
Those are some big “ifs” though. Anything else, and YHOO stock is still going to face some sort of huge tax bill, and that assumes anyone would want to buy Yahoo’s struggling core operation.
Nevertheless, even with the worst-case tax bill scenario, the market still pegs Yahoo’s core business as worth less than nothing. Big mistake.
Bottom Line for YHOO Stock
To answer the question, without factoring in the impact of taxes (however the board ends up dealing with them), Yahoo’s core business has been valued by Citigroup’s Mark May at something between $3.4 billion and $4.1 billion, rather than the -$15 billion the market says it’s worth. Tax advisor Robert Willens pegs the figure closer to $5 billion.
Splitting the difference and saying Yahoo’s core operation is worth $4.2 billion is still miles ahead of the -$15 billion market valuation investors have currently priced the core operation at via the value of YHOO stock, even with the looming tax bill.
Yes, a $12 billion tax liability is a lot. The market has still more than priced that figure in, however.
Assuming yahoo.com and all of its sites are worth something around $4.2 billion (which is reasonable), and assuming a suitor for its core business is found (once again, a reasonable expectation), and assuming Alibaba is interested in buying back Yahoo’s stake in BABA (perhaps the biggest uncertainty of the three), Yahoo as a pre-breakup company is still arguably worth something around $45 billion rather than its current market cap near $29 billion. That translates into a $47.70 value for Yahoo stock.
And, even if $12 billion worth of taxes is due, the company’s value is still something near $33 billion, making YHOO stock worth $35 per share, give or take. If anything close to a respectable premium price is offered for the company’s core business, current YHOO shareholders should be cheering the prospect of a buyer rather than fearing it.
The catch?
Whatever Yahoo is going to do, it needs to do it fast while its core operation is still marketable and salvageable, and while BABA shares are healthy.
With each passing day, both run an increasing risk of hitting a wall.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
