Starboard acquires "significant stake" in Yahoo, suggests AOL would be a good merger partner for Yahoo
Starboard Value LP announced it has acquired a significant ownership stake in Yahoo and that it has delivered a letter to Marissa Mayer, President and CEO of Yahoo, and to Yahoo's Board of Directors.
Starboard believes that unlocking the substantial value from Yahoo's non-core minority equity stakes in Alibaba Group and Yahoo Japan in a structure that delivers value directly to Yahoo shareholders in a tax-efficient manner. Even after the previous ill-timed and tax-inefficient sales of Alibaba stock, Yahoo's remaining stake in Alibaba is currently worth more than the entire enterprise value of Yahoo. When adding Yahoo Japan, these two minority equity interests are worth approximately $11 billion, or $11 per share more than the current enterprise value of the Company. This is before ascribing any value to Yahoo's core business, intellectual property, or real estate holdings, and clearly shows the dramatic valuation discrepancy that currently exists at Yahoo.
Starboard would like to see management realize substantial cost efficiencies by reducing expenses throughout the Company, specifically with a goal of reducing losses in the Display business by $250-500 million. Would like to see an end to Yahoo's aggressive acquisition strategy which has resulted in $1.3 billion of capital spent since Q2 2012 while consolidated revenues have remained stagnant and EBITDA has materially decreased.
Clearly Yahoo is deeply undervalued relative to the sum of its parts. Starboard believes this value gap can be closed with minimal tax leakage and without delay based on actions within the control of management and the Board. We believe it is incumbent upon management and the Board to take immediate steps in committing to remedy this valuation discrepancy. Comparable advertising companies currently trade in a range of between 6x and 11x next twelve months EBITDA. Assuming a very conservative multiple of 5.5x EBITDA, which represents approximately a 10% free cash flow yield, this implies a value gap of almost $18 billion or $18 per share from the current share price.
Starboard believes management should pursue a strategic combination with AOL to improve Yahoo's competitive position, deliver cost synergies of up to $1 billion, and potentially facilitate the realization of value from Yahoo's non-core equity stakes with minimal tax leakage. While a cost reduction program could lead to significant value creation, this opportunity pales in comparison to the synergies that we believe Yahoo could unlock in a combination with AOL. In fact, like Yahoo, we believe AOL's Display business also continues to lose a substantial amount of money. The combined entity would be able to more successfully navigate the ongoing industry changes, such as the growth of programmatic advertising and migration to mobile. A combination could also lead to revenue growth opportunities given the broader user base, higher quality content, better technology assets, and enhanced relationships with advertising agencies.
Yahoo's recent strategy of focusing on acquisitions has not worked. Yahoo's stock price has merely been buoyed by the strong growth in value of Alibaba. We understand that the likely result of monetizing Yahoo's non-core minority investments in the most tax efficient manner likely means that the Company will not have access to those proceeds to be used towards acquisitions. However, even if the Company were to deliver all of the value from its non-core minority investments directly to shareholders without receiving any additional cash proceeds, it is important to note that Yahoo would still have $7 billion in cash and cash equivalents (after returning to shareholders approximately 50% of the Alibaba IPO proceeds) and significant debt capacity which would be more than sufficient for any future capital needs for investments or acquisitions. To be clear, while Yahoo is trading at such a deep discount to the sum-of-its-parts, we do not believe the Company should be pursuing acquisitions of companies at high multiples of revenue as it has done repeatedly in the past.