Can A Buffett Bid Make A Difference For Yahoo Stock?

  • Yahoo's second round of bids has come in much lower than expected.
  • Warren Buffett is reportedly backing a consortium that is interested in Yahoo's assets.
  • Can a Buffett bid make a difference for Yahoo?

Yahoo's (NSDQ:YHOO) attempt to sell its core assets has been beset by several challenges, key among them being that early bidders have reportedly lowballed their offers after going through Yahoo's due diligence materials. According to an earlier report by the Wall Street Journal, Yahoo has received bids in the range of $2B-$3B, well below the $4B-$8B range that most analysts were expecting. According to another report by CTFN, the bidders saw information in Yahoo's virtual data room that caused them to reconsider their earlier estimates. Among the issues brought up include lack of comprehensive key information about the business, business projections that were not very compelling and a troubled revenue to EBITDA ratio.

Some Yahoo investors and Wall Street analysts are convinced that those extremely low numbers being put out could be nothing but a farce. CNBC's David Faber has called the report for the lowballed bids ''completely wrong.''  Mr. Faber says that such rumors would be in the interest of a bidder like Verizon which would give it a good chance to game the situation.

At this point, it's still hard to ascertain whether these reports are accurate. Yahoo's core has more than $600M in EBITDA. A valuation in the $2B-$3B for the core business translates to just 3.3X-5X EBITDA, way lower than the 8X EBITDA average for Internet businesses.

A Buffett Bid for Yahoo

While the matter is far from conclusive, it has already set the stage for a very disappointing offer for Yahoo, whose investors might even balk at such a low offer. Verizon (NYSE:VZ) is still leading the camp of Yahoo suitors, and recently received a leg up on its rivals when it hired a former Yahoo banker to help it with the bidding process. Verizon has also added Bank of America to its team which will help it to not only gain intimate knowledge of Yahoo but also offer significant financial support. Most of Yahoo's other investment bankers including Lion Tree, Guggenheim, and Allen & Co. are boutique banks with limited ability to fund a deal of such a magnitude. Verizon is interested in Yahoo ad-tools, especially video ad tools such as BrightRoll, which it will be looking to combine with its AOL assets.

Reports about low bids for Yahoo are certainly disconcerting for its investors. But maybe there is still some hope for its investors. There are reports that Warren Buffett is backing a consortium that is bidding for Yahoo's assets. The consortium includes Quicken Loans Founder Dan Gilbert who is reportedly interested in Yahoo Finance.

Investors are hoping that Buffett's interest in the company might lead to bidding war which might help raise the level of bids. There are several reasons why Buffett might have a strong interest in the matter. Although a Yahoo bid would represent a rare journey into digital media for Buffett since he has traditionally favored investing in major consumer brands, industrial companies, and U.S. insurers, his track record investing in beleaguered media companies bears him out. Buffett invested in debt-laden Media General (NYSE:MEG) in 2012 through a $450M debt relief for a 20% stake in the company. Buffett also bought majority of the company's newspapers and in the process became one of the largest publishers in the U.S. Media General stock jumped 30% immediately after Buffett's investment was announced. The stock has since then climbed more than five-fold.
MEG stock chart

Source: Media General Stock Price Chart by amigobulls.com

Buffett's interest in Yahoo would be pretty consistent with his pattern of investing in companies that have fallen out of favor, that have a huge user base, and are undervalued. Although Yahoo's userbase is reputed to be contracting, some of its assets such as Tumblr, Yahoo Weather and Yahoo Sports are still recording user growth.  A Buffett bid would send signals that he still believes the company still has untapped potential, and would help to improve the bids. So Yahoo's core might still be able to fetch more than the higher end of the $2B-$3B being thrown about.

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