Yahoo shares are responding favorably to media reports that the company’s board of directors is considering abandoning plans for the Aabaco spinoff and/ or selling its core business. Yahoo shares climbed by as much as 6.56% to $35.92 per share in afternoon trading today as analysts weigh in on the media reports.
Yahoo must consider tax implications
There has been a great deal of uncertainty on whether Yahoo’s Aabaco spinoff will be granted tax-free status. If it isn’t, then the spin will be extremely expensive, so it makes a lot of sense for the company’s board to reconsider whether it is a good idea to move forward with it.
Some analysts have been assuming that the spin will receive tax-free status and have factored this assumption into their models because of their confidence, but most of Wall Street isn’t convinced. Last night’s report from The Wall Street Journal indicated that the board is reconsidering because of the potential tax implications.
What else could Yahoo do?
Other than completing the spinoff of Aabaco with its stake in Alibaba, Yahoo could choose just to sell its core business (as multiple investors are now calling for); spin off the core business; sell all of itself; sell its assets in Asia outright; hold the Aabaco spin until the IRS rules on whether it can be tax-free; continue as things are; or issue tracking stock. SunTrust Robinson Humphrey analyst Robert Peck believes that the IRS’ indecision could have created too much risk of taxes being placed on the spin.
He thinks one of the easiest ways for Yahoo to create value is simply to sell off its core business, which could bring in net proceeds of about $6 billion to $8 billion, compared to his estimated GAAP cost basis at $6.1 billion. Even assuming a zero tax cost basis, however, he said the sale could create a tax bill of $2.5 billion to $3.2 billion, which would still be much lower than “the small likelihood of a potential tax bill as large as $19-$22B.”
Who would buy Yahoo?
If Yahoo decides to sell its core business (as Starboard Value wants), the analyst sees the potential for both private equity and strategic buyers to be interested. He said there could be several PE firms interested in buying Yahoo’s core business but notes that investors have suggested that major media and telecommunications companies might be interested.
On the list of possible interested parties are Comcast, AT&T and DirecTV, Verizon and AOL, News Corp, Disney, and CBS. The benefits Peck sees are an instant increase in monthly user reach, the addition of a cross media platform, improvements in mobile reach, better digital advertising technology, patents, and others. Based on all the possible scenarios, Peck has maintained his Buy rating and $40 per share price target on Yahoo stock.
Prior to the report that Yahoo is rethinking its options, we were hearing murmurings that CEO Marissa Mayer’s job could be on the line amid a rash of recent executive departures. Peck believes her fate and that of other senior-level management will probably be related to “the potential acquirer’s needs.”
Skepticism about selling Yahoo’s core business
On the somewhat bearish side of the potential sale of Yahoo’s core business is Pivotal Research analyst Brian Wieser. While he supports such a transaction, he questions whether a buyer could be found. He said the core business is in a “seemingly permanent decline on a like-for-like business, with growth salvaged over the long-run (in our model) by the use of free cashflow [sic] to buy revenue through acquisitions.”
He notes that currently it is possible for Yahoo to remain a “large plater” in search without making any more acquisitions, but he thinks that anything less than being number one might be weak. He doubts that growth will match the levels of the rest of the search industry because digital markets enjoy some efficiencies by focusing their budgets on only one company, a.k.a., Google. Small advertisers are unlikely to buy from more than one platform, and other companies like Facebook could eat into Yahoo’s market share by entering the business.
Wieser sees similar problems in Yahoo’s display advertising business as well, noting that it has been taking a hit from deflation because the company is no longer the only one that offers “efficient audience aggregation.” He sees limited opportunity in video advertising as well.
Yahoo Mail the only good piece?
The analyst seems to think that the only piece of Yahoo that might interest potential acquirers is Yahoo Mail because it still has a significant base of loyal users for the platform. This is where telecommunications companies like Verizon might be interested. He also suggests that data and marketing companies might be interested, like when ADS bought Conversant. However, he thinks Yahoo might not get enough for its core business.
“The big question is whether anyone would actually show up with a meaningful bid,” Wieser cautions investors in his Dec. 2 report. “We can understand why a buyer looking to attach their existing assets to a large media property might look at Yahoo only reluctantly vs. alternative strategies.”
He believes private equity buyers might be more likely to come up with “realistic bids” if strategic buyers don’t and places a value of only $1.9 billion on Yahoo’s core business, not including the $5.8 billion in cash the company is expected to have on its balance sheet at the end of 2016. He maintains his Hold rating and $37 per share price target on Yahoo stock.
