Valuing Yahoo (YHOO) on a sum-of-parts basis has been doing the rounds in the investment community for some time now. Late last year there was news floating around that AOL might team up with a private equity firm and make a bid for Yahoo. Buyout firms Silver Lake Partners and The Blackstone Group (BX) were a few of the interested parties, although no formal proposal was drawn.
Doing a simple back-of-the-envelope sum-of-parts valuation for Yahoo reveals the following:
Closing Price: $13.68 (8/29)
1. Yahoo Japan (TYO:4689): According to the latest 10-Q, Yahoo management estimates the value of its stake in Yahoo Japan to be around $7bn.
ð Value per share = $5.38
TYO = Tokyo Stock Exchange
2. Alibaba(1688.HK): Yahoo holds 43% equity stake in Alibaba. This translates into an approximate value of its stake at around %5.3bn.
ð Value per share = $4.1
HK = Hong Kong Stock Exchange
3. Cash: According to latest 10-Q, Yahoo had $1.5bn in cash and another $1.3bn in short-term assets, totaling to $2.8bn.
ð Value per share = $2.21
These three parts have a combined value of $11.69. This essentially implies that the rest of Yahoo is valued at around $1.99/sh. Doesn’t look very exciting, does it? Especially when at one point Yahoo was prime real estate on the internet.
The driver behind "unlocking" the value from breaking up Yahoo does not come from its publicly listed investments, but from Yahoo’s private investments in Taobao.com and Alipay.com.
Taobao is the market leader in online shopping in mainland China and commands a hefty 90% market share. It is a Chinese amalgamation of eBay (EBAY) and Amazon (AMZN). Independent sources estimate that Taobao reported revenues of around $1bn for year 2010. Considering that the chinese e-commerce market is expected to increase manifold in the coming years, Taobao definitely has a very bright future. Some independent valuators have valued Taobao (expected to go public in 2012) anywhere between $50-100bn. If Yahoo were to offload its 40% stake in the currently private entity, it could easily cash in anywhere between $20-40bn.
Another hidden gem in Yahoo’s portfolio is Alipay.com, a third-party online payment platform. It has the largest market share in China and in 2011 was the largest payment processor in the world by number of transactions. This company was valued at anywhere between $25-40bn with Yahoo’s share of investment ranging from $10-15bn.
Taking these two investments into consideration, value added per Yahoo share would turn out to be as follows:
|Value of Yahoo's 40% Stake||$30bn||$56bn|
|Value after discounting to tax and other purposes (discounted at 40%)||$12bn||$22.4bn|
|Value per Yahoo Share||$9||$17|
When these two investments are taken into consideration, Yahoo should trade anywhere between $21-29/sh.
To “unlock” this value we will need a private equity player to buyout Yahoo-- either as a standalone or with someone as a partner-- and offload these Asian businesses. Yahoo management by themselves would not be too willing to break-up the company, even though time and again management has indicated that its investment in Alibaba is purely financial in nature. In either case, there is a good possibility that Yahoo will be taken out-- whether it is a strategic buy or a financial one. It’s not a question of if, but when?