Marissa Mayer announced on the Yahoo (YHOO) Q4 2015 earnings call this week that "It's clear to everyone our situation is complex ... Our strategy for maximizing value is also going to be complex." This might be a bit of an understatement.
Now, its market value is less than the un-taxed positions it owns in Alibaba (NYSE:BABA) and Yahoo Japan. But the "Yahoo's core business is undervalued" thesis has been something that just hasn't played out well for over a year now.
And it seems that the company keeps getting steamrolled on every "value unlocking" thesis that it comes up with, including the planned spin-off of Alibaba. Yahoo has now been forced to throw everything on the table, announcing it's up for selling its core business. Something it was previously adamant about not doing - rather, looking to do a reverse spin-off of the core business. However, that spin-off of the core biz (which was to be done in lieu of the Alibaba spin) would've still been taxable. There appears to be no strategic alternative it hasn't explored at this point.
It's just not the mishandling of unlocking value, there have been a number of other missteps. And not just the Tumblr acquisition, where it paid $1 billion. On the Q4 '15 call, Yahoo said it was writing down a quarter of its purchase of Tumblr. Then, there's the poor investments in Community, hiring of Katie Couric, investing in Yahoo Screen and other content/shows that it's now has to step back from.
In September, I noted that Yahoo is a sum-of-the-parts shenanigans story, but also noted that I'd be willing to pay somewhere around $20 to $25 a share for it. This goes back to April, when I noted that not being long Yahoo was a contrarian idea. At the time, I noted:
Not all special situations are really that special. The well-told Yahoo long story looks to be getting long in the tooth. It's also overshadowed the gloom that Alibaba is facing. Reverse engineering Alibaba's value, we think there's at least 20% downside.
The downside was more than double my guess. Shares are now getting closer to that $25 level that would make the stock remotely interesting, to me at least.
The key with the SOTP is that the company isn't going to shut everything down and spin off Yahoo Japan and Alibaba taxable for just 20% upside. Starboard Value, the activist investor that's been involved with Yahoo for over a year, is likely invested at prices much higher.
One of the keys for YHOO is that much of its value and stock price is tied to Alibaba. Hedge funds are piling in on the short the yuan trade. I'm not hopeful for the future of Alibaba. One of the easiest ways for home gamers to play the short yuan is short Alibaba in my opinion.
But, even if you short out the Alibaba exposure, theoretically, locking in that $15 in value, throw in another $5 for Yahoo Japan and you have $20 in value. Maybe it can sell Yahoo core for between 2-4x EBITDA, giving you $2 to $4 in value. Throw in the $5 a share in cash and you've got a ~$30 stock trading for $29. Hardly a screaming buy.
Now, you can argue that maybe Yahoo sells the core business for 8x EBITDA, but does another $3 a share really make the company worth the risk. The upside still doesn't justify the risk, especially not while Marissa Mayer is at the helm. It's becoming clear that there's rift in the board room, where Mayer is still trying to sell Wall Street a turnaround story while the rest of the board just wants to get the company sold for as much as possible. The only remaining answer for Starboard Value is a proxy fight. We'll reevaluate once we get closer to proxy time, where Yahoo's annual meeting will likely be at the end of July.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.