Yahoo Q2 2016 Earnings Is All About The Sale Process

  • After an endless process to sell the company’s core business, Yahoo is finally approaching the end.
  • Yahoo will announce the third bidding round results and acquisition terms.
  • Operating results are secondary to the selling process announcement.

Internet giant Yahoo (NSDQ:YHOO) is expected to report its Q2 2016 earnings results next week amid the sluggish progress in the sale process that is about to enter its third and final bidding round by July 18. Yahoo’s sale process is the final step in a long and exhausting strategic change the company initiated last year that started with an attempt to spin-off Yahoo’s stake in Alibaba (NYSE:BABA) into a newly formed publicly traded special purpose enterprise consisting only of Alibaba shares and small operating activity carved from Yahoo.

In the beginning, investors were more than happy about the move that would allow the company to unlock the potential value of the Alibaba holdings. However, later on, as the IRS refused to pre-approve this spin-off as a tax-free transaction, the concerns of a too costly tax implication drove the company to halt the spin-off. At this point, an activist investor fund, Starboard Value, pushed the company to change its course and keep the Asian assets for now (Yahoo Japan and Alibaba) and to sell its core business that was valued back then in the broad range of $4 billion to $8 billion. While holding several seats on the company’s board, Starboard Value tried to maximize shareholder value. The company sold lucrative Silicon Valley real estate and patents while closing disappointing businesses to lower the spending.

Initially, Starboard Value pushed for the sale, claiming that Yahoo could receive a significant amount of cash for its core business. However, in reality, bids came in lower than expected with the first round of bids ranging between $2B and $3B – significantly less than the amount that had been broadly adopted as the target price range of the deal ($4B–$8B). As the process continued, more and more companies joined the race for Yahoo’s core business, including Verizon (NYSE:VZ), AT&T (NYSE:T), Twitter (NYSE:TWTR), Facebook (NSDQ:FB), Alphabet Inc-C (NSDQ:GOOG), and P-E firm TPG, and a group led by Quicken Loans founder Dan Gilbert, and backed by Warren Buffet, were among the bidders.

At the final stages of the process, only four players remained in the race: Verizon, AT&T, Gilbert/Buffet group, and TPG, with offers ranging from $3B to $5B and differentiating from one another depending on whether the offer was to include patents, real estate, or only the core business (or even parts of it). Starboard Value, which initiated the move to sell Yahoo’s core business, could not afford a low-priced deal and thus pushed for some bidding rounds in an attempt to increase the final price. There is a concern that if the final bids do not satisfy Yahoo’s board, the company will reject them, which would have a tremendously negative impact on the stock price. The final results will be announced on July 18 when Yahoo is expected to report its Q2 2016 earnings results.

With such a significant announcement that could either make Yahoo’s stock price plunge or soar, Yahoo’s quarterly financial results and business progress are secondary to the sale process. If Yahoo decides to terminate the sale process and beats the Q2 consensus forecast with flying colors, the stock will go down anyway because the main issue this quarter is the sale of Yahoo's core asset. In this upcoming earnings release, investors will keep an eye on the sale process and the answers to these five questions: Will Yahoo complete the deal? Who is the buyer? What is the price? Which assets have been sold? What are the terms of the sale? Even though the operating results are secondary to the sale, these are the financial numbers to look out for:

Q2 2016 Consensus Q2 2015 Actual
Revenues $1.08B $1.24B
EPS $0.097 -$0.02
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