A sale that only creates more uncertainty that seems to be the main take away from analyst reports on Yahoo’s announced sale to Verizon Communications.
Verizon has agreed to acquire Yahoo’s core business for $4.8 billion in cash, excluding Yahoo’s current ownership stakes in Alibaba Group, Yahoo Japan Corp, cash, converts, and the holding company’s Exclaibur IP portfolio (valued at $1 billion by Morgan Stanley).
While the headline figure of $4.8 billion seems below expectations, it is widely believed that this number includes any tax liabilities. Management has stated that the majority of the proceeds received from the sale will be returned to shareholders, although it stops short of saying how it intends to distribute the proceeds.
Yahoo: Plenty of questions to be answered
The deal has given some clarity on the value of Yahoo’s core business, yet it has also has created plenty of uncertainty regarding Yahoo’s future.
Analysts at Morgan Stanley believe that going forward Yahoo will now solely be viewed as a trading vehicle for its 15% stake in Alibaba Group, “with the investment case based around the closing of the current estimated ~39% liquidity discount to fair market value.” Credit Suisse points out that this liquidity discount doesn’t just apply to the Alibaba holding it also applies to Yahoo’s ownership of Yahoo Japan.
The Yahoo holding company owns just over two million shares in Yahoo Japan, which at the current price of ¥455 and a USD/JPY exchange rate of 106 is worth $8.675 billion a 20% liquidity discount (tax liabilities and a discounted sale price) gives an implied value of $6.94 billion this holding.
Yahoo’s ownership of Alibaba amounts to 384 million shares, which at the current price of just under $83 is worth approximately $32 billion. A 20% liquidity discount gives an implied value of $25.7 billion.
Of course, these values are highly flexible. There is still plenty of uncertainty regarding the sale of Yahoo’s Alibaba ownership stake, and Credit Suisse points out that at the current price of $38.50 (July 25) the market is implying an effective liquidity discount of 35%, reflecting a full tax burden on the sale of the holding:
“While the headline $4.83b is below our prior core valuation of the company, Yahoo highlighted that the cash proceeds to the shareholder once the transaction is consummated will be close to the announced price, reflecting minimal tax implications. Hence with the value of the core assets now locked in, YHOO shares at current levels now reflect a hedge against further deterioration of the business and one of the two scenarios for its ownership stakes of Alibaba and Yahoo Japan: 1) full tax burden, or a 2) ~35% liquidity discount.”
Morgan Stanley adds more detail:
“The challenging part for us is that assessing YHOO’s ability (or timing) to sell its BABA stake in a tax efficient manner is beyond our core area of expertise. The past year’s events (a failed forward spin in 2H:15) and uncertain IRS and regulatory environment going forward make this even more unpredictable.”
“We apply a 30% liquidity discount to YHOO’s BABA shares (effectively a 15% probability of a tax-free sale) because, even after YJ is sold, there is a lack of clarity around: 1) Timing of a monetization event,2) What would motivate BABA to buy these shares without a material discount (given retiring them would trigger a taxable event) or 3) Who other than BABA would be a willing buyer of this ~15% BABA stake without any effective voting control.”
And on the issue of Yahoo Japan Morgan opines:
“To us it is notable that YHOO intends to preserve the pre-tax value of BABA in the new YHOO Hold Co (with no intent to sell on a taxed basis), but it is considering a wider range of options around YJ (including a fully taxed sale of the shares). Given this, we believe a sale of YJ (even if fully taxed) is a logical next step in working to close the BABA liquidity discount…and therefore, we apply a fully taxed 35% liquidity discount to YHOO’s YJ shares in our new sum of the parts valuation.”
So overall, while the sale of Yahoo’s core business will lead to some clarity on the outlook for the holding company, the future of the Yahoo Group remains uncertain.