-0.25%
+0.31%
Can you trust Yahoo’s Board to do the right thing? I don’t know but assuming Yahoo (YHOO) approves a deal similar in structure to the rumored cash-rich spin of its Asian assets, I believe the shares have substantial upside, north of $20 at least, maybe upper $20s or even $30. That is enough upside along with the latest seemingly more substantiated rumors to make YHOO a good long idea despite the Board’s deservedly bad reputation. The short-term is going to remain very volatile and the wrong move by the company’s Board or further delay in making a “go” decision could knock the stock back down toward $14-15. Offsetting this risk is the presence of Daniel Loeb and Third Point Capital and other activist shareholders. The Board has got be awfully nervous about doing a bad deal.
The rumored deal under consideration at today’s Yahoo Baord meeting is quite similar to what Eric Jackson outlined in his Forbes article published on November 9th. As a fan of John Malone and long many of his stocks currently and over the years, I thought Jackson had nailed it. Malone successfully used a cash rich spin to monetize Liberty Media’s large stake in DirecTV (DTV). Cribbing from Eric Jackson (credit due where it is earned), here is my analysis of what appears to be on the table:
Yahoo will sell back to Alibaba 25% of its equity and maintain a 15% interest. Yahoo will sell all of Yahoo Japan. Both sales will be done in a cash rich spin where Yahoo puts its stake in the Asian entities into a new company while the Asian companies put in cash and operating assets. Operating assets have to be at least 1/3rd of the deal so based on $12 billion for Alibaba and $5 billion for Yahoo Japan, I think Yahoo ends up with:
Alibaba Cash $5.0B
Japan Cash $3.3B
Alibaba Assets $2.5B
Japan Assets $1.7B
Existing Cash $3.0B
Alibaba 15% $5.0B
Total $20.5B.
This leaves the core YHOO business. What is core YHOO worth? 2012 consensus EBITDA is $1.5B. Is it worth a 5X multiple for $7.5 billion? If so that gives you $28 billion, including $11.3 billion in cash. Against current shares outstanding of 1.24 billion that gets you to $22.50, up 40% from current prices with minimal tax leakage remaining in the future and assuming stagnant value for YHOO’s ongoing 15% stake in Alibaba.
What are YHOO shares worth if the company uses the $11.3 billion to buyback shares? If they tendered at a premium, say $18 since they are telling the private equity folks that their bids a little below $18 are too low, YHOO could buyback half the stock for $11B and be debt free. Crazy to be debt free in my opinion but that is a separate argument.
Post buyback, Yahoo has no cash (but FCF and no debt), $5B in 15% of Alibaba, the core biz at $7.5B, and the acquired assets at $4.2 billion for a total of $16.7 billion. Against the new lower share base of 620 million you are up to $27 per “new Yahoo” share. I’d add leverage which could boost the shares into the $30s.
At $16, I think there is an awfully large “Board sucks/Board mistrust” discount especially when you got Loeb and others keeping them honest.
Disclosure: YHOO and DTV are net long positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.
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