Will Yahoo Spinoff Core Business As Verizon Shows Interest

  • According to CNBC’s David Faber, Yahoo will, after all, not  spinoff its stake in Alibaba but will instead explore sale of its core business.
  • This has come after activist investor Starboard called for Yahoo's management to consider spinning of the business instead of its Alibaba stake due to the huge tax implications.
  • Verizon's CFO Lowell McAdams has reiterated his earlier comments that the company is open to exploring a merger with Yahoo.
  • Who are the other possible candidates?

After what seemed like an eternity, it appears as if some concrete information has finally surfaced regarding whether Yahoo (NASDAQ:YHOO) board has made up its mind to go ahead with the planned spinoff of its 15% stake in Alibaba (NYSE:BABA), or spinoff its core business instead. CNBC’s David Faber has reported via Twitter that Yahoo will not spinoff its 384 million shares in Alibaba primarily due to concerns that the IRS might tax the transaction, but will instead explore sale of the core business. Yahoo’s board is yet to officially give its verdict on whether or not it will spinoff Yahoo’s core business as called for by activist investor Starboard a couple of weeks ago.

Meanwhile, Verizon (NYSE:VZ) has become the first company to openly express interest in buying Yahoo’s core if the company’s management puts it up for sale. Verizon’s CFO Lowell McAdams yesterday backed up comments he had made during the UBS investor conference by saying that Verizon would explore buying Yahoo’s Internet business. That should take a load off the shoulders of Yahoo investors who had begun fearing no takers would come forth, especially since Yahoo's board has delayed giving a verdict on Yahoo spinoff.

Other interested buyers?

Verizon is just one of the media/telecom companies that had been speculated as possible buyers of Yahoo’s core business. Others include Comcast -A (NASDAQ:CMCSA), Time Inc (NYSE:TIME), News Corp. (NASDAQ:NWS), AT&T (NYSE:T), and Walt Disney (NYSE:DIS). SunTrust analyst Robert Peck thinks that News Corp. and Time would be interested in getting their hand on some parts of the business while AT&T would be interested in the merger to match up better against the Verizon/AOL merger. Meanwhile, Walt Disney would probably be interested in tapping into Yahoo’s vast cache of user data to help it market its movies and theme parks.

I had argued in this piece here that Microsoft (NASDAQ:MSFT) would probably be interested in buying out Yahoo’s business to strengthen its Bing search engine. The two companies currently have a working revenue-share search engine partnership where Bing acts as the default search engine for Yahoo. The two companies renewed their earlier search engine deal that was originally penned in 2010.

It’s widely thought that Yahoo’s negotiated a better revenue-share arrangement that reduced Microsoft’s share of search revenue generated through the partnership from around 90% to maybe 80% or perhaps less. By buying out Yahoo’s Internet business, Microsoft’s Bing search engine share would almost double and help it counter Alphabet Inc-C (NASDAQ:GOOG) dominance in the space. Microsoft under former CEO Steve Ballmer wanted to buyout Yahoo in 2008, and only Yahoo’s reluctance prevented a deal from happening.

But a look at Microsoft’s acquisitions under CEO Satya Nadella puts a damper on the possibility of a merger with Yahoo happening. Unlike Ballmer, Nadella is not too keen on M&A, and his biggest acquisition during his 20-month tenure as Microsoft CEO remains the $2.5 billion buyout of Minecraft maker Mojang. Nadella has also overseen the huge $7.6 billion writeoff of Nokia’s handset business.

There is a lot of speculation about a fair value for Yahoo’s core business being floated around, with a valuation range of $2 billion to $4 billion being mentioned. It’s not clear if Yahoo’s current value proposition would be enough to make Nadella want to bite the bait at that price.

Spinning off Yahoo’s core seems like a no-brainer, considering that the other alternative of spinning off Alibaba would attract a huge tax bill of $9 billion to $10 billion compared to less $1.6 billion if Yahoo’s core is spunoff. Of course that depends on whether or not the IRS will decide to tax the transaction.

Judging by the current look of things, there is not only a good chance that Yahoo’s board will vote in favor of spinning off the core business, but also that the business will actually find a buyer before long.

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