- Standard & Poor's may downgrade Yahoo's debt.
- The underlying company, with nearly $5 billion in revenue, is considered worthless.
- It could easily fetch $5 billion or more in a sale to a Comcast, Disney or Verizon.
Investors who like speculating on mergers and break-ups should be looking closely at Yahoo (NASDAQ:YHOO) stocks this holiday season. Pressure is growing on the board to write-off CEO Marissa Mayer and sell off the assets. The pressure grew on Wednesday after Standard & Poor’s warned it might cut the rating on Yahoo debt due to stalled revenue growth.
The company currently has a BB+ rating on $1.34 billion in long term debt, against $41 billion in assets. But the agency said it could still lower that rating if the company’s competitiveness in search and display advertising “continues to decline” and it is not able to reverse “negative operating trends.”
Mayer has been CEO of Yahoo for three years now, and earned $42 million last year. But she was hired away from Google, now Alphabet Inc-C (NASDAQ:GOOG), in 2012 on the promise that she could transform Yahoo from a media company into a tech company, and she has failed in that mission.
Morale remains low, top executives are departing, and as S&P notes, the numbers are poor. Revenue has declined from $4.9 billion in fiscal 2012 to $4.6 billion in 2014, and looks set to fall short of $5 billion for all of 2015. Operating income has been negative for all three quarters so far, and the company’s results remain skewed by the investments in Yahoo Japan, controlled by Softbank (OTC:SFTBY), and Alibaba (NYSE:BABA), in which co-founder and previous “Chief Yahoo” Jerry Yang invested $1 billion back in 2005.
Mayer has appeared successful by slowly reducing the Alibaba stake, and now wants to spin it off into a company called Aabaco which is worth $31.8 billion based on Tuesday’s closing price of $80.83 for Alibaba. Yahoo’s own market cap at the close of trading Tuesday was $30.9 billion, meaning investors consider the underlying company, including its stake in Yahoo Japan, to be worthless.
But Yahoo’s vast array of Web sites, including acquisitions, and its ad network, could be worth $5 billion or more to a media company, such as Comcast -A (NASDAQ:CMCSA) (which has been buying into Internet media companies like Vox) or Walt Disney (NYSE:DIS), even a phone company like Verizon (NYSE:VZ) (which recently bought AOL) or AT&T (NYSE:T), one that needs a stake in the Internet as a pipeline for their content, like video streaming. The Yahoo Japan stake would be a bonus. A sale of the company could provide a 20% pop to current shareholders, if an auction were even hinted at. But there has been no hint.
It’s a tragedy worthy of a Greek or Shakespeare, given that Yahoo was Google before Google existed, that it became a “portal” at the insistence of Wall Street, and that the move distracted managers from the real value of search, leading to their creation of a media company that even a Google technologist could not transform or turn around.
But as an investor you should not care about the story, or its compelling characters. You should care about getting your money out. Yahoo, in pieces, is worth much more than Yahoo together, and the break-up is coming.