Everyone knows that the overwhelming majority of Yahoo! Inc.‘s (YHOO) valuation is tied to the stake it owns in Alibaba Group Holding Ltd (BABA).
YHOO owns 384 million shares of BABA, valued at nearly $31 billion. So with a $36 billion market capitalization, YHOO stock owners can conclude that 86% of its valuation is tied to BABA.
This fact is why Yahoo stock looks like a gold mine, because it not only has the Alibaba ownership, but also other valuable assets to consider. Unfortunately, SoftBank Group Corp (SFTBF) might have just thrown a big wrench in the 2+2=4 valuation analysis used to conclude that YHOO stock is a great opportunity.
What Did Softbank Do to YHOO Stock?
By now, you have probably heard that Softbank is selling $7.9 billion worth of BABA stock. Softbank, along with Yahoo have the largest ownership stakes in Alibaba. Even after Softbank’s divestment, it will still own 28% of Alibaba’s shares outstanding.
Regardless, Yahoo has been entertaining a series of bids for its core internet business that reportedly range from $4 to $8 billion. Therefore, it is largely known that Yahoo will divest this core internet unit, and that will leave it with its existing cash and equivalents of $7 billion, a Yahoo! Japan stake valued at $9 billion and the $31 billion BABA stake.
If Yahoo gets $6 billion for its core business, then the collective, 2+2=4, valuation of Yahoo is $53 billion, a 47% premium to YHOO stock price.
However, after last year’s shenanigans, we now know that YHOO will not spinoff its 384 million shares of Alibaba. This means that in order for Yahoo stock to realize the full value of its BABA investment, it must find someone who wishes to acquire its stake.
Otherwise, it would have to do the spinoff and potentially be liable for a tax bill upwards of $9 billion. If that happens, the $9 billion payment must be reduced from YHOO stock’s sum of parts valuation, putting it at $44 billion, a premium of just 22% for Yahoo stock.
As a result, Yahoo desperately needs someone to purchase its ownership in BABA, and it has been largely considered that either Alibaba or Softbank would be the only eligible suitors.
A couple months ago Robert Willens, an accountant and tax advisor, explained that Verizon Communications Inc. (VZ) could buy Yahoo core, YHOO could divest its Alibaba stake and then spin off Yahoo Japan and its cash to form a new company with a special dividend that would cost Yahoo less than $1 billion in tax obligations. The key here is that Alibaba must buy back the 384 million shares, or even Softbank.
Unfortunately, since Softbank is selling nearly $8 billion in Alibaba stock, we can write them off as potential suitors.
Furthermore, the fact that Softbank is preparing to dilute the market by unloading so many shares, suggests that Alibaba may be more inclined to buyback those shares rather than purchase from Yahoo anytime soon.
In other words, Softbank just destroyed any plan that Yahoo may have had to get rid of its BABA ownership without the big tax liability. Looking ahead, it is more likely than not that Yahoo pays billions of dollars to Uncle Sam.
With that said, Yahoo stock has somewhere between 22% and 47% upside, and that’s assuming that BABA stock stays around $80.
Most investors would take that return, but the problem is Yahoo’s dysfunction at the top, management’s inability to make a plan and stick with it, and a lack of faith among investors. Given these new developments, investors are likely best-suited sitting on the sidelines.
As of this writing, Brian Nichols does not own any of the aforementioned securities.
