Can Yahoo Get A Decent Price For Its Core Business?

  • Yahoo has already formed a committee to explore its strategic options and could start scouting for potential buyers this week.
  • Several media companies have been mentioned as possible buyers.
  • Yahoo's earnings and MAUs have been on a steady decline. Can the company command a good sale price?

In the clearest sign yet that a sale of Yahoo's (NASDAQ:YHOO) core business could be imminent, Yahoo’s management has formed an independent committee to explore its options and hired three investment bankers namely J.P. Morgan, PJT Partners, and Goldman Sachs to oversee the process. Meanwhile, Bloomberg has reported that Yahoo could start approaching potential bidders as early as this  week, with companies such as Comcast (NASDAQ:CMCSA), Verizon (NYSE:VZ), AT&T (NYSE:T) mentioned as possible buyers, as well as private equity firms such as TPG, KKR, and Bain Capital.

Although so far Verizon remains the hot favorite to purchase Yahoo, AT&T and Comcast would no doubt be interested in getting their hands on Yahoo’s 1B users and its video assets, though in the case of AT&T its acquisitive appetite might be sated for the moment after its recent purchase of DirecTV for $48.5B. A bidding war would work in Yahoo’s favor and help push its sale price higher.

Verizon remains the only company to have openly expressed interest in buying Yahoo with CEO Lowell McAdam on record saying:

"At the right price, I think marrying up some of their assets with AOL and the leadership would be good,"

AOL, which Verizon bought for $4.4B in June of 2015, has also had a say in the matter with CEO Tim Armstrong saying that certain of Yahoo’s assets could fetch a good price but at the same time adding that any buyer would be wary of catching a falling knife. Armstrong added that everything at the moment remained theoretical since Yahoo would have to initiate the sale process then share its data regarding its users, distribution, talent, and monetization before the ball could really get rolling. He made a candid point about something that is often ignored when trying to work out a fair value for Yahoo’s business:

“Assets with a rapidly growing number of users are very expensive. Even those with a stable number of users are expensive.’’

So basically, any company that buys Yahoo would be interested in its web assets and/or its huge number of users. Although Yahoo has not divulged official MAU numbers since 2013 when it declared it had crossed the 800M mark, the general consensus is that the company has hit about 1B MAUs, with 150M of those being located in the U.S. Total number of mobile MAUs are ~140M.

Now that is an enormous number of users since it places Yahoo in the league of Internet giants such as Facebook (NASDAQ:FB) and Alphabet Inc-C (NASDAQ:GOOG). The big problem for Yahoo is that recent confidential reports as per Business Insider say that the company has been experiencing steep declines in traffic. According to the report, Yahoo Mail daily active users, or DAUs, declined 11.5% Y/Y to 56.9M during the first week of December 2015; people visiting Yahoo.com Homepage declined 16.5% Y/Y to 52.6M while Yahoo Search daily traffic fell 8.8% Y/Y to 43.5M.

The bright part about that report was that Tumblr, Yahoo Sports, and Yahoo Weather all had recorded an increase in DAUs, though the report did not quantify the numbers. It’s possible that the increase was big enough to cancel out the declines across other products since a site like Tumblr is reputed to have more than 500M monthly active users.

Number of users tends to be far more important for social media companies, as Twitter (NYSE:TWTR) investors understand only too well than for web companies such as Yahoo and Google. Still, any company that buys Yahoo will want to have some level of confidence that Yahoo’s huge volume of internet traffic will not be reduced to a trickle just a few years down the line. So those huge declines could come back to haunt Yahoo when trying to negotiate a good price.

Yahoo does have some strong points though. The company’s Mavens (mobile, video, native advertising and social) initiatives is the only revenue segment at Yahoo that is still showing good growth--revenue up 26% during Q4 2015 to $472M. Yahoo has been investing heavily in things like video. The company acquired BrightRoll, a video-ad unit, a few years back and that could prove invaluable to a buyer due to the growing popularity of video ads.

Despite its shrinking userbase, Yahoo might still be able to command a respectable price from a buyer like Verizon. After all, Verizon still paid $4.4B, or 7.7x EBITDA, for AOL in 2015 despite the fact that the company operates a moribund dial-up Internet business, and had seen a decline of 36% in the number of Internet subscribers to 2.3M over a 3-year period prior to its sale. In its defense, AOL’s ARPU (average revenue per user) had grown 15% over the period. AOL’s impressive ARPU of ~$250 might also have helped fetch a good price for the company.

Many analysts estimate that a fair value for Yahoo’s core would be ~$3.5B, or about 4x 2015 EBITDA. Yahoo’s Mavens is probably what many companies would be interested, and that segment comprises nearly half of the company’s revenue and is growing at a healthy clip. Several analysts have estimated that Yahoo could get as much as $8B for its core.

In a scenario where Alibaba agrees to buyback the entire 15% of Alibaba stocks that Yahoo owns, Yahoo would be lucky and get away with a minimal tax bill of only $800M or thereabouts instead of the current projection of $8B+ if the transaction is fully taxed. Assuming the above favorable scenario unfolds and Yahoo’s core is valued at $8B, the upside to Yahoo’s current share price could easily exceed 40%.

In a worst case scenario where Yahoo's spinoff is fully taxed by the IRS at 38% and Yahoo's core is valued at only $3.5B, then upside to Yahoo's current price would fall to ~12%.

I suspect the actual sale price will be somewhere between those two estimates, which implies an upside of about 20%-30% to current Yahoo stock price.

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