- Yahoo's management has indicated that it could sell its non-core assets for $1B-$3B.
- The momentum on Yahoo to spin off its core business continues to build.
- Despite a big rally over the past one month, Yahoo stock still looks significantly undervalued.
For the past few days, Yahoo's (NASDAQ:YHOO) stock has been rallying and has for the first time this year crossed from the red to the black after its management revealed that the company could net anywhere between $1B-$3B after selling its non-core assets. Yahoo’s non-core assets include land, patents, and other property. Yahoo has a pretty extensive patent portfolio and has managed to sell or license patents worth $600M over the past three years.
Yahoo stock has experienced a sustained rally over the past one month ever since news emerged that the company was actively exploring a sale of its core Internet business. Yahoo stock is up 24% over the past one month.
Yahoo Stock 1-Month Returns
Source: CNN Money
So given that Yahoo can realize that much from sale of its non-core assets, what is the current fair price for Yahoo shares? Let’s assume Yahoo sells its core business as planned, spins off its 35% stake in Yahoo Japan and the transaction is taxed at 38%, Alibaba (NYSE:BABA) agrees to buy back the 15% stake that Yahoo owns in the company, sale of Yahoo’s non-core assets fetches $2B and Yahoo’s core is valued at 5x 2016 expected EBITDA of $800M, then a fair value of Yahoo shares would be around $46, or about 36% higher than current price. For this upside to be fully realized, things would have to work out as outlined above and any major deviations could significantly change the bull case. For instance, a spinoff of Alibaba holdings that is fully taxed by the IRS at 38% would yield an upside of just 11%.
The math here suggests that the market is still assigning a negative valuation for Yahoo’s core business. For a business with $4.5B in annual revenue and a billion users, that’s absurd even when you throw in the fact that this is a business that is losing money. After all, the huge number of users on Yahoo’s platform, user data and even Yahoo’s brand would prove invaluable to the buyer.
Meanwhile, it’s become clearer with each passing day that Yahoo’s management will have little choice in the matter with so much pressure coming from Starboard and other investors. Starboard reportedly plans to push for control of Yahoo’s board while Yahoo appears resigned to cede two board seats to the activist shareholder. Yahoo has already taken steps to cut 15% of its workforce after Starboard called for the company to control its spending in a bid to make itself more attractive to a potential buyer. Ultimately this might turn out to be a long-drawn process as Yahoo sells bits and pieces of itself. But the general feeling is that Yahoo won’t have too much trouble finding buyers for its businesses.