On October 19 The Wall Street Journal reported that multiple private equity firms are studying a potential bid for Yahoo. Further, the article suggests a deal could be done around $16 to $18 per share.
It is wel- known that Yahoo is undergoing a strategic review after firing its CEO and having an activist hedge fund take a significant stake in the company. The price range is new news, and worth considering.
Earlier this week Yahoo reported earnings of $0.23 per share. This was above the Wall Street consensus estimate of $0.17 cents. Yahoo’s earnings beat needs to be viewed in the context of a core business that is still struggling as revenue declined 24%. However, Yahoo still generated almost $250 million in free cash flow in the quarter, which is attractive to private equity.
In its earnings presentation Yahoo notes that the value of its stake in Yahoo Japan is $6.4 billion and its 29% ownership in Alibaba.com is worth $1.3 billion (both valuation are as of Sept. 30, 2011).
At its current stock price of $15.94, Yahoo has a market capitalization of $20.3 billion and an enterprise value of $17.6 billion. Yahoo has $2.7 billion in net cash on its balance sheet, or $2.11 per share. Subtracting the value of Yahoo Japan from Yahoo’s market capitalization and removing the cash results in a value of $11.2 billion that can be ascribed to Yahoo’s core business and its investment in Alibaba Group, which includes Taobao.
In September, private equity firm Silver Lake Partners and Russian venture company Digital Sky Technologies agreed to invest $1.6 billion in Alibaba Group, which valued Yahoo’s 43% stake in Alibaba Group at $13 billion.
This analysis suggests that at its current stock price, Yahoo’s core business is not being ascribed any value. In fact, the value is negative $1.8 billion. Monetizing Yahoo’s assets would result in some level of tax leakage, which could accounts for some of this disconnect, but not all of it. In reality, the market sees Yahoo’s core business as declining, with no evidence that management has a strategy to turn it around -- in fact, there is currently no CEO. Further, a deal would be complicated, but this is where private equity comes in. Its job is to execute complicated deals and unlock value.
If we create Yahoo’s core business at 6x trailing-12-month EBITDA of $1.7 billion, we get a value of $10.2 billion. Adding up the values of Yahoo’s core business, stakes in Yahoo Japan and Alibaba Group, and its net cash results in a market capitalization of $32.3 billion, or approximately $25 per share.
Therefore, if The Wall Street Journal report is true and a deal occurs in the $16-18 per share range, the private equity consortium, in exchange for the complicated task of unlocking the value in Yahoo’s assets, will stand to generate a significant return.
For the sake of Yahoo’s beleaguered shareholders, if there is a deal, it should be closer to $20 per share than $16.
Disclosure: I am long YHOO.
