Yahoo Stands to Reap $11 Billion in Breakup (Correct): Real M&A
2014-09-30 02:22:07.301 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>. Corrects
second paragraph to replace Softbank with Yahoo Japan.)
By Tara Lachapelle
Sept. 30 (Bloomberg) -- Yahoo! Inc. shareholders are
inching closer to a potential $11 billion windfall.
Activist fund Starboard Value LP stepped up pressure on
Yahoo last week to break itself up, a move analysts say could
amount to an $11 billion market value gain. Starboard’s
proposals include Yahoo selling its valuable stakes in Alibaba
Group Holding Ltd. and Yahoo Japan Corp. and merging with
advertising rival AOL Inc. The ideas lay out a plan for
rewarding investors who are losing confidence in Chief Executive
Officer Marissa Mayer’s ability to create value with the
acquisitions she’s been making.
Yahoo, now worth less than those Asian stakes, has put $1.3
billion toward takeovers since 2012, around the same time Mayer
took the helm, according to Starboard. During that period,
earnings before interest, taxes, depreciation and amortization
dropped by almost half as revenue also slid. Investors are now
left holding a $40.52 stock that could be valued at more than
$50 in a breakup -- $51 if you ask Gabelli & Co. and up to $57
by Albert Fried & Co.’s estimates.
“This is a very classic sum-of-the-parts story: If you can
break up the company into its different parts, it would be worth
a lot more,” Brett Harriss, an analyst for Gabelli, said in a
phone interview. “The last thing shareholders want is the
management team going out and trying to be venture
capitalists.”
Alternatively, Yahoo may be a good acquisition for Alibaba
or SoftBank, Harriss said. A deal would enable Alibaba to buy
back its shares from Yahoo without a large tax leak. As SoftBank
searches for targets, buying Yahoo would increase its stakes in
Yahoo Japan and Alibaba.
Sarah Meron, a spokeswoman for Sunnyvale, California-based
Yahoo, declined to comment.
Starboard Record
In past investments such as Office Depot Inc. and TriQuint
Semiconductor Inc., Starboard’s exhaustive research and activism
have helped yield gains for shareholders.
The activist is now targeting a company whose business
investors assign no value. Yahoo shares are instead buoyed by
the stakes in Alibaba and Yahoo Japan, which add up to more than
Yahoo’s closing price yesterday of $40.52. Investors are
awaiting the potential payoff from selling those assets, rather
than expressing bullishness on Yahoo itself.
With the hype over Alibaba’s initial public offering dying
down, bears are beginning to pile in to Yahoo. Short interest is
up sixfold from the start of the year to 1.9 percent, the
highest since March 2012, four months before Mayer became CEO,
according to data compiled by Markit.
“Now that Alibaba’s IPO is in the rearview mirror, Yahoo’s
no longer benefiting from Alibaba’s ‘What if’ valuation
questions,” Youssef Squali, a New York-based analyst at Cantor
Fitzgerald LP, said in a note yesterday. “Marissa Mayer’s
honeymoon with investors is over.”
Looking for Cash
While Mayer has focused on making purchases to try to
position the Web portal for future growth, shareholders would
prefer to see the company’s cash returned to them, said Sameet
Sinha, a San Francisco-based analyst at B. Riley & Co.
“You have an activist investor saying ‘You have this cash
and we just want to make sure that you will utilize it
responsibly, versus the last couple of years where you’ve made a
lot of acquisitions that we haven’t seen bear any fruit,’”
Sinha said in a phone interview.
Yahoo’s trailing 12-month Ebitda was about $1.8 billion in
the period before Mayer took over and embarked upon a takeover
spree, according to data compiled by Bloomberg. It has since
fallen to $948 million. Revenue declined about 7 percent over
that same span.
Tax Savings
Analysts have described many ways Yahoo can reward
investors, though most say that a tax-efficient method for
exiting the Asian stakes takes priority.
Yahoo retained a 16.3 percent interest in Alibaba after the
Chinese e-commerce company’s IPO earlier this month. Selling its
remaining shares would create a large tax bill, which could be
avoided if Alibaba took over Yahoo, shareholder Ironfire Capital
LLC has suggested.
Yahoo is also the second-largest owner of Yahoo Japan
behind SoftBank, which means SoftBank could use an acquisition
as a way to gain more control of the Japanese business. SoftBank
has had internal conversations about buying Yahoo, according to
a person familiar with the matter, who asked not to be
identified discussing private information.
Mitsuhiro Kurano, a Tokyo-based spokesman for SoftBank,
declined to comment.
Free Business
The sum of Yahoo’s parts equates to about $51 a share, with
about $7.50 from the Yahoo Japan stake, $34 for its interest in
Alibaba and $9 a share of cash, according to Gabelli’s Harriss.
That means any acquirer would be getting Yahoo’s core business
for free.
“Even if Yahoo’s U.S. business went to zero tomorrow, it
would still be a fantastic deal for SoftBank or Alibaba,”
Harriss said. “And it would be a win for shareholders if they
went out and sold themselves.”
Starboard is proposing that AOL, which has reinvented
itself as a competitor in the digital-advertising industry,
merge with Yahoo to save as much as $1 billion of expenses. Not
only would there be cost-cutting opportunities, it may even
boost revenue, according to Brian Wieser, a New York-based
analyst at Pivotal Research Group LLC.
“Being a larger player means you are in a far better
position to get a larger share of your customers’ wallets,”
Wieser said in a phone interview. “It also means you have a
larger customer base over which to amortize expenses and capital
investment that you might not otherwise undertake. For example,
investing in higher-quality video content.”
Asset Swap
B. Riley’s Sinha says there’s a way for Yahoo to both merge
with AOL and sell its Alibaba stake without the tax penalty:
SoftBank could first buy AOL, then exchange it with Yahoo for
the Alibaba shares.
He also estimates Yahoo could add about $15 to its stock
price by raising money domestically and then giving it to
shareholders, rather than paying them with the repatriated
proceeds from the Asian assets. Apple Inc. made a similar move
last year by borrowing funds to repurchase stock instead of
using its overseas cash hoard, which would have been taxed.
The issue for Mayer with keeping Yahoo’s proceeds
internationally is that it reduces her flexibility for making
further acquisitions, Sinha said.
“Management always wants to do the right thing probably,
it’s just that they also have other motivations,” he said. “So
it can be good to have an activist there.”
For Related News and Information:
Yahoo’s Mayer Under Scrutiny as Starboard Pushes to Unlock Value
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AOL Reincarnated as Digital Ad Powerhouse Entices Yahoo Activist
NSN NCJ18D6TTDS0 <GO>
Yahoo Valued at Less Than Asian Assets After Alibaba’s IPO
NSN NC6RK56TTDS0<GO>
Alibaba Ambitions Signal Deals for Snapchat to Akamai: Real M&A
NSN NBPDKS6VDKHU <GO>
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Real M&A columns: NI REALMNA <GO>
Top deal stories: DTOP <GO>
--With assistance from Brian Womack in San Francisco, Alex
Sherman in New York and Takashi Amano in Tokyo.
To contact the reporter on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Whitney Kisling
2014-09-30 02:22:07.301 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>. Corrects
second paragraph to replace Softbank with Yahoo Japan.)
By Tara Lachapelle
Sept. 30 (Bloomberg) -- Yahoo! Inc. shareholders are
inching closer to a potential $11 billion windfall.
Activist fund Starboard Value LP stepped up pressure on
Yahoo last week to break itself up, a move analysts say could
amount to an $11 billion market value gain. Starboard’s
proposals include Yahoo selling its valuable stakes in Alibaba
Group Holding Ltd. and Yahoo Japan Corp. and merging with
advertising rival AOL Inc. The ideas lay out a plan for
rewarding investors who are losing confidence in Chief Executive
Officer Marissa Mayer’s ability to create value with the
acquisitions she’s been making.
Yahoo, now worth less than those Asian stakes, has put $1.3
billion toward takeovers since 2012, around the same time Mayer
took the helm, according to Starboard. During that period,
earnings before interest, taxes, depreciation and amortization
dropped by almost half as revenue also slid. Investors are now
left holding a $40.52 stock that could be valued at more than
$50 in a breakup -- $51 if you ask Gabelli & Co. and up to $57
by Albert Fried & Co.’s estimates.
“This is a very classic sum-of-the-parts story: If you can
break up the company into its different parts, it would be worth
a lot more,” Brett Harriss, an analyst for Gabelli, said in a
phone interview. “The last thing shareholders want is the
management team going out and trying to be venture
capitalists.”
Alternatively, Yahoo may be a good acquisition for Alibaba
or SoftBank, Harriss said. A deal would enable Alibaba to buy
back its shares from Yahoo without a large tax leak. As SoftBank
searches for targets, buying Yahoo would increase its stakes in
Yahoo Japan and Alibaba.
Sarah Meron, a spokeswoman for Sunnyvale, California-based
Yahoo, declined to comment.
Starboard Record
In past investments such as Office Depot Inc. and TriQuint
Semiconductor Inc., Starboard’s exhaustive research and activism
have helped yield gains for shareholders.
The activist is now targeting a company whose business
investors assign no value. Yahoo shares are instead buoyed by
the stakes in Alibaba and Yahoo Japan, which add up to more than
Yahoo’s closing price yesterday of $40.52. Investors are
awaiting the potential payoff from selling those assets, rather
than expressing bullishness on Yahoo itself.
With the hype over Alibaba’s initial public offering dying
down, bears are beginning to pile in to Yahoo. Short interest is
up sixfold from the start of the year to 1.9 percent, the
highest since March 2012, four months before Mayer became CEO,
according to data compiled by Markit.
“Now that Alibaba’s IPO is in the rearview mirror, Yahoo’s
no longer benefiting from Alibaba’s ‘What if’ valuation
questions,” Youssef Squali, a New York-based analyst at Cantor
Fitzgerald LP, said in a note yesterday. “Marissa Mayer’s
honeymoon with investors is over.”
Looking for Cash
While Mayer has focused on making purchases to try to
position the Web portal for future growth, shareholders would
prefer to see the company’s cash returned to them, said Sameet
Sinha, a San Francisco-based analyst at B. Riley & Co.
“You have an activist investor saying ‘You have this cash
and we just want to make sure that you will utilize it
responsibly, versus the last couple of years where you’ve made a
lot of acquisitions that we haven’t seen bear any fruit,’”
Sinha said in a phone interview.
Yahoo’s trailing 12-month Ebitda was about $1.8 billion in
the period before Mayer took over and embarked upon a takeover
spree, according to data compiled by Bloomberg. It has since
fallen to $948 million. Revenue declined about 7 percent over
that same span.
Tax Savings
Analysts have described many ways Yahoo can reward
investors, though most say that a tax-efficient method for
exiting the Asian stakes takes priority.
Yahoo retained a 16.3 percent interest in Alibaba after the
Chinese e-commerce company’s IPO earlier this month. Selling its
remaining shares would create a large tax bill, which could be
avoided if Alibaba took over Yahoo, shareholder Ironfire Capital
LLC has suggested.
Yahoo is also the second-largest owner of Yahoo Japan
behind SoftBank, which means SoftBank could use an acquisition
as a way to gain more control of the Japanese business. SoftBank
has had internal conversations about buying Yahoo, according to
a person familiar with the matter, who asked not to be
identified discussing private information.
Mitsuhiro Kurano, a Tokyo-based spokesman for SoftBank,
declined to comment.
Free Business
The sum of Yahoo’s parts equates to about $51 a share, with
about $7.50 from the Yahoo Japan stake, $34 for its interest in
Alibaba and $9 a share of cash, according to Gabelli’s Harriss.
That means any acquirer would be getting Yahoo’s core business
for free.
“Even if Yahoo’s U.S. business went to zero tomorrow, it
would still be a fantastic deal for SoftBank or Alibaba,”
Harriss said. “And it would be a win for shareholders if they
went out and sold themselves.”
Starboard is proposing that AOL, which has reinvented
itself as a competitor in the digital-advertising industry,
merge with Yahoo to save as much as $1 billion of expenses. Not
only would there be cost-cutting opportunities, it may even
boost revenue, according to Brian Wieser, a New York-based
analyst at Pivotal Research Group LLC.
“Being a larger player means you are in a far better
position to get a larger share of your customers’ wallets,”
Wieser said in a phone interview. “It also means you have a
larger customer base over which to amortize expenses and capital
investment that you might not otherwise undertake. For example,
investing in higher-quality video content.”
Asset Swap
B. Riley’s Sinha says there’s a way for Yahoo to both merge
with AOL and sell its Alibaba stake without the tax penalty:
SoftBank could first buy AOL, then exchange it with Yahoo for
the Alibaba shares.
He also estimates Yahoo could add about $15 to its stock
price by raising money domestically and then giving it to
shareholders, rather than paying them with the repatriated
proceeds from the Asian assets. Apple Inc. made a similar move
last year by borrowing funds to repurchase stock instead of
using its overseas cash hoard, which would have been taxed.
The issue for Mayer with keeping Yahoo’s proceeds
internationally is that it reduces her flexibility for making
further acquisitions, Sinha said.
“Management always wants to do the right thing probably,
it’s just that they also have other motivations,” he said. “So
it can be good to have an activist there.”
For Related News and Information:
Yahoo’s Mayer Under Scrutiny as Starboard Pushes to Unlock Value
NSN NCJ7WR6KLVRB <GO>
AOL Reincarnated as Digital Ad Powerhouse Entices Yahoo Activist
NSN NCJ18D6TTDS0 <GO>
Yahoo Valued at Less Than Asian Assets After Alibaba’s IPO
NSN NC6RK56TTDS0<GO>
Alibaba Ambitions Signal Deals for Snapchat to Akamai: Real M&A
NSN NBPDKS6VDKHU <GO>
SoftBank Ending T-Mobile Deal Opens Door to Dish, Line: Real M&A
NSN NAPV9M6TTDSJ <GO>
Real M&A columns: NI REALMNA <GO>
Top deal stories: DTOP <GO>
--With assistance from Brian Womack in San Francisco, Alex
Sherman in New York and Takashi Amano in Tokyo.
To contact the reporter on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Whitney Kisling
