- Verizon CEO has openly said that it would consider buying some of Yahoo's assets to help shore up its 2015 AOL acquisition.
- This comes a week after Yahoo's management said that it was exploring strategic alternatives for the company.
- What is a fair value of Yahoo shares? Here's why Verizon might be interested in buying Yahoo's core Internet business.
Just a couple of weeks ago, Verizon (NYSE:VZ) told the investing world to toss into the rumor hopper, a report that it was lining up a bid for Yahoo (NASDAQ:YHOO). However, now it has emerged that the rumor did indeed have some substance to it after Verizon CEO Lowell McAdam spoke with Jim Cramer on CNBC’s Mad Monday on Saturday, Feb 6, 2016, saying:
"At the right price, I think marrying up some of their assets with AOL and the leadership would be good,"
The news comes hot on the heels of Yahoo’s recent Q4 2015 earnings call where its management expressed its interest in pursuing ‘‘strategic alternatives’’ for the company. Verizon had earlier denied a New York Post report which claimed that the giant carrier had made a $8B bid for Yahoo’s core business.
Yahoo currently has a market cap of $26.4B and an enterprise value of $21.8B. At the current Yahoo stock price, the market is actually assigning a negative valuation to Yahoo’s core business as shown below:
|Implied value for Yahoo's Core Business|
|Current YHOO Enterprise Value||$21,830|
|Less: Alibaba Group stake at 38% discount||($14,074)|
|Less: Yahoo Japan stake at 38% discount||($4,631)|
|Less: Net cash||($5,857)|
|Implied value of Core Business||$(2,732)|
Estimates for a fair value of Yahoo’s core business by analysts range from $3B-$3.5B, or ~3.9 x 2016 EBITDA. Using those estimates, a fair value of Yahoo shares would be ~$32.80, or about 22.7% upside to the current price. But even these estimates could turn out to be quite conservative. Verizon paid $4.4B for AOL in June 2015, or about 7x AOL’s 2015 EBITDA. You could argue that Yahoo’s web business is much more valuable than AOL’s rather moribund core dial-up business in spite of the fact that earnings are shrinking. Yahoo’s huge 56% drop in earnings during the last quarter was orchestrated by a large $4.6B impairment charge which the company took on the revised carrying value of some of its business segments. In such a case, $8B for Yahoo’s core does not appear stretched, which implies 40% upside to current the Yahoo stock price.
That said, perhaps the more important question for investors right now is whether there are any solid reasons why Verizon might be interested in buying Yahoo, and it turns out there are quite a few. Verizon has staked its future on video and mobile growth in the hope to attract millennials who are more accustomed to watching videos on their mobile phones than watching TV in their living rooms. Yahoo has, over the last couple of years, been investing in online video and the so-called Mavens (mobile, video, native advertising and social) initiatives. Yahoo’s Mavens is the company’s only revenue segment that is still growing at a healthy clip, up 26%Y/Y during the last quarter to $472M.
Yahoo’s business might be shrinking, but the company still remains an Internet giant by almost any yardstick. Yahoo’s offerings of mail, finance, sports, and a wide range of video sites attract more than 1 billion users, which would swell AOL’s 2B users by a good 50%. Verizon has more than 105 million wireless subscribers, and that kind of web traffic would prove an invaluable asset to help the company lure and retain a smartphone-addicted generation.
Yahoo’s video-ad unit BrightRoll would be a good addendum to Verizon’s ad-supported mobile video service, go90. BrightRoll would help Verizon easily bulk up its video user base and help the company compete better with the likes of Alphabet Inc-C (NASDAQ:GOOG) and Facebook (NASDAQ:FB) for advertising dollars. Oh, and let’s not forget that Yahoo is still generating more than $1B in revenue every quarter after deducting traffic acquisition costs.
Verizon could choose to pounce, now that it knows chief rival AT&T (NYSE:T) has its acquisitive appetite satiated after its recent purchase of DirecTV for $48.5B. Meanwhile, Sprint appears too cash-strapped to pursue a deal.
Verizon has finally openly admitted to wanting to buy some of Yahoo’s assets (read: Yahoo’s core), and that is a good thing for Yahoo’s long-suffering investors. Whether or not Verizon will actually make a decent bid and whether Yahoo’s management will consent to a deal is a different matter altogether. What is undeniable is that Yahoo does have some valuable web assets that might prove too alluring for many media companies to continue passing up for long.