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YHOO : Highly Undervalued And About To Be Bought By Softbank?

|Includes: Altaba, Inc. (AABA), BABA, SFTBY

Summary

1) The sum of the stake of Yahoo and Softbank in Alibaba post-IPO will be 49%.

2) The market is overestimating the tax burden on Yahoo by assuming ALL its stake is being liquidated.

3) Softbank has 1300 companies under it but Masayoshi Son only sits on the board of Yahoo Japan, Alibaba, and Softbank

The numbers indicate that Yahoo should be worth north of 45 billion (about 15% more than current market cap). And that Softbank could be buying it. Here's why:

Yahoo currently owns a 24% (523.6 million shares) stake in Alibaba. Not 22.6% or 30% being thrown around. Here is the latest quarterly presentation. This means Alibaba has about 2.182 billion shares outstanding. Softbank currently has a 34.1% stake (744 million shares) in Alibaba.

Yahoo will be selling 140 million shares during the IPO which will reduce its stake to 383.6 million shares post IPO. Softbank isn't selling any, so it will still have its 744 million shares post-IPO.

Alibaba is issuing 123 million additional shares during the IPO bringing the total outstanding shares to 2.304 billion shares post-IPO (insiders are selling 197 million shares but those are already counted in the 2.182 billion I believe)

So post-IPO, Yahoo's stake will be 383.6/2304 = 16.64% and Softbank's will be 744/2304 = 32.3 %. Add those two together and you have 49%. A very curious percent considering a lot of companies maintain a 51%-49% split to retain control of the firm.

Per this article, Softbank has 1300 companies under it but Masayoshi Son only sits on the board of Yahoo Japan, Alibaba, and Softbank. Softbank is a very acquisitive firm and acquiring Yahoo gives Masayoshi son a bigger stake in Alibaba, a much bigger stake in Yahoo Japan, and a foothold in the American market - all in one swoop.

Onward to Yahoo's valuation:

For the purposes of this, I am assuming a conservative $60 IPO price (the lower end of the $60-$66 price range) with a conservative 20% "pop" post-IPO (if Alibaba doesn't "pop" that much, I don't know what will). I assumed a 35% tax rate.

Most articles have ignored the tax implications of the sale of Yahoo's stake. Those which did, went the other extreme and calculated it as it Yahoo was liquidating its entire position. In my opinion, the truth is in between. I believe the tax rate should be applied only to the shares being sold by Yahoo during the IPO (140 million). This gives Yahoo after-tax proceeds of $5.5 billion after paying taxes of $2.9 billion (I have conservatively assumed a cost basis of zero).

Yahoo is going to hold on to the 383.6 million shares post IPO. The CFO of Yahoo, Ken Goldman, has made it clear that he is actively exploring all means to reduce the tax burden (e.g. since Yahoo holds a portion of its Alibaba stake in Hong Kong - it can avoid capital gains tax by holding the shares for a year more). These 383.6 million shares will be valued at $27.6 billion post-IPO.

Yahoo owns a 36% stake in Yahoo Japan which has a market cap of $22.5 billion. So Yahoo's stake amounts to about $8.1 billion

Yahoo has cash & marketable securities to the order of $4.3 billion.

Add all the above up ($5.5 billion + $27.6 billion + $8.1 billion + $4.3 billion) and you get $45.5 billion.

Yahoo's market cap as of today's close was $40.9 billion. So, Yahoo's US operations are being valued at not zero (as many have reported) but a NEGATIVE $4.6 billion!!

Hence I believe that there is significant potential upside in Yahoo. $46 per share just to get to a zero valuation for its US business AND in addition - the following elements/potential elements: the valuation of its US business; IPO repricing surprise based on the roadshow going on; better "pop" than 20% on IPO; a possible buyout premium by Softbank if a deal happens, and Alibaba continuing to outperform.

My MS Excel data table indicates that for every $1.00 increase in BABA pricing (pre-IPO), adds $0.55 to YHOO's share price based on a 20% post-IPO pop.

Valuation

$46

Disclosure: The author is long YHOO.