A diary of the thought process behind my investment decisions
Yahoo For Sale
Company For Sale
"THE BOARD HAS A FIDUCIARY OBLIGATION TO ENGAGE WITH ANY LEGITIMATE PERSON THAT COMES FORWARD WITH A GOOD OFFER. THE BOARD WILL ALWAYS DO ITS FIDUCIARY OBLIGATIONS WHEN SOMETHING LIKE THAT OCCURS" - Yahoo Chairman Maynard Webb on CNBC, December 9, 2015
The Fiasco At Yahoo
To say that the Yahoo's core business is being mismanaged is an understatement. To say Yahoo has been taking piles of cash and lighting in on fire would be a better description. Here are some examples of how Yahoo has incinerated shareholder money:
Yahoo paid $20 million for rights to stream an NFL game. In addition, there were production and streaming costs. The result was $3 million of ad revenue
Yahoo pays Katie Couric over $10 million a year for a streaming show with low viewership
Yahoo also created two original series that resulted in low viewership
Yahoo has spent hundreds of millions of dollars buying zombie companies in order to hire programmers
Yahoo top management pays itself handsomely for the amazing feat of lighting cash on fire
Yahoo Core Value In A Sale
I could make a page long list of how Yahoo wastes money but I believe I have made my point. Any half competent, non arsonist should be able to at least double Yahoo's EBITDA and cash flow. I am assuming that in a sale Yahoo would be able to fetch at least 8 times its very depressed EBITDA, which would be $6.4 billion or $6.81 per share.
Some large Yahoo shareholders believe that Yahoo can fetch a price 50% higher but I want to be conservative in my assumptions. Despite complete mismanagement Yahoo is still one of the top visited sites on the internet with nearly $5 billion in revenue expected for 2016. Yahoo owns real estate that Starboard had appraised for a value of $1.5 billion (the crown jewel is a nearly 1 million square foot campus in Silicon Valley). Yahoo also owns $700 million worth of intellectual property and patents. I assigned no value to either the real estate or the IP in my estimate of the value of Yahoo. It is very possible that my assessment of Yahoo core's value is too low.
Cash, Yahoo Japan and Alibaba Holdings Value (all values as of the close of December 16, 2015)
The value of the remainder of Yahoo's assets are as follows: Yahoo has $5.8 billion in cash or $6.16 a share in cash. Yahoo owns $32.5 billion worth of Alibaba shares at yesterday's closing price of $84.63. I am assuming that once the core business is sold and the company is simplified into essentially a holding company that the discount on Alibaba shares will narrow to 20%, which I believe is conservative. At a 20% discount Alibaba is worth $27.66 per share. Yahoo's stake in yahoo Japan is worth $8.4 billion. I am assuming that Yahoo Japan will trade at a 40% discount as it currently is not clear to me how Yahoo will dispose of Yahoo Japan without paying taxes. If they find a way to do this than there is additional upside in the shares. At a 40% discount Yahoo's stake in Yahoo Japan is worth $5.35 per share.
Yahoo Total Value (all values as of the close of December 16, 2015)
Yahoo core $6.81 per share (at 8 X depressed EBITDA)
Cash $6.16 per share
Alibaba Holdings $27.66 per share (at 20% discount)
Yahoo Japan $5.35 per share (at 40% discount)
Total value $45.98 per share
Recent Price $33.78
Total upside 36.1%
Yahoo Current Valuation
I believe the market is currently pricing in a worst case scenario for the value of Yahoo (assuming that one hedges the value of Alibaba and Yahoo Japan). At the current valuation both Yahoo Japan and Alibaba Holdings are being valued at a 40% discount to their market value, which is lower than their fully taxed value. The core business is being valued at four times depressed EBITDA and receiving no credit for real estate and IP. In a worst case scenario where Yahoo core could not be sold a decent operator should be able to increase EBITDA by getting rid of the obvious waste and by monetizing some of the assets. Yahoo has roughly 11,000 employees and one can make the argument they can operate with a significantly smaller amount.
Yahoo Shareholder Revolt
Yahoo has an array of activist shareholders that are all fed up with the performance of management and the board. I would encourage you to read the letters from Canyon Capital and Starboard to the board of directors among others. The writing is on the wall that a nasty proxy fight is in store if Yahoo does not sell the core business. The only way for management and the board of directors to gracefully exit the situation is to sell the core business. The alternative is being humiliated as it is clear that Marissa Mayer is not the right leader for this company. I believe the board will take the logical route and sell the core business or it will be done for them once the board is ousted in a few months.
The Reason For This Opportunity
There are a number of reasons I believe such an attractive opportunity exists. I believe there are currently non economic sellers in the stock. Yahoo is likely most appropriate for event driven investors because of the many moving parts. A year ago event driven was the hottest category of hedge funds and was seeing inflows. After a year of poor performance the strategy is now seeing outflows, creating the equivalent of forced sellers. In addition, there are likely a number selling for tax loss purposes and because they are fed up in general.
Yahoo is a difficult stock for a plain vanilla fund to hold because one must have an opinion on all the parts. Alibaba Holdings and Yahoo Japan cannot be hedged out because of short selling restrictions for these funds. Once the core is sold and Yahoo Japan is sold or separated the remaining stock will be much simpler, essentially an Alibaba tracking stock.
After years of stumbling around the Yahoo board is finally doing the right thing by putting up the core business for sale. While investors are fatigued there is finally a light at the end of the tunnel.