Why Yahoo Board Might Plan To Sell Its Internet Business?

50.10
Trefis
YHOO: Yahoo! logo
YHOO
Yahoo!

Yahoo! (NASDAQ:YHOO) has not been able to improve its core internet business despite numerous product refreshes and launches to boost its revenues. News has surfaced that Yahoo’s board is weighing its options for its internet business and will discuss whether to proceed with its plan to spin off its investment in Alibaba (currently worth over $30 billion) in a series of board meetings that ends today. [1] We believe that selling the internet business might be a challenge as it is not as lucrative as it once was in the face of increasing competition from other content providers.

In the past, the company has considered big merger deals such as the one with Microsoft Corp. that never came to fruition. A host of possibilities exist including selling the internet business to a private equity player or a telecommunications service provider. In this note we explore why it makes sense for Yahoo to sell the internet business and who are the potential buyers.

Click here to see our full analysis of Yahoo

Relevant Articles
  1. Yahoo Price Estimate Revised To $50 As Company Commences $3 Billion Buyback
  2. Yahoo Earnings: Revenue Decline Continues As Deal For Core Business Closes In June
  3. Yahoo Earnings Preview: Revenue Set To Decline As Slide In Ad Revenues Continues
  4. Yahoo Earnings: Slide In Core Advertising Derails Revenue Growth Once Again
  5. Should Verizon Continue To Pursue The Yahoo Deal?
  6. Yahoo Earnings: Search And Display Revenue Growth Continues To Elude The Company

Why Selling The Internet Business Makes Sense?

Yahoo has a 15.4% stake in Alibaba valued at nearly $32 billion based on Thursday’s closing share price for the Chinese e-commerce company. It also has a 35% interest in Yahoo! Japan valued at $8.3 billion. Together, with over $5 billion cash, these investments exceed the total valuation of the company. This, of course, is driving Yahoo’s plans to spin off its stake in Alibaba into a separate tax-free entity. However, the IRS has declined to provide the Private Letter Ruling (PLR) affirming the transaction’s tax-free status, stating only that it had not concluded the transaction would be taxable. As a result, uncertainty remains regarding the transaction’s tax status and the possibility remains that a sizable tax liability could arise upon completion of the distribution.

By selling off Yahoo’s internet business, the board not only monetizes (and thus unlocks) the underappreciated internet properties but also manages to establish a company that consists solely of its investment. This is a win-win situation as the company might not have to pay a tax liability of approximately $11 billion (at 35% tax rate) or roughly $12 per share of Yahoo.

Who Can Potentially Acquire Yahoo’s properties?

Yahoo’s portfolio consists of some famous websites such as Yahoo! Finance, Yahoo! Sports, Yahoo! news and Yahoo! mail. These websites have over 1 billion unique visitors with over 700 million users for its mobile apps.  Considering the sizeable footprint in the Internet, Yahoo’s web properties can attract private equity players who are looking to pivot Yahoo’s content business into one that offers products for online video or placing ads on other websites programmatically.

It is also possible that Yahoo’s internet business, which consists of video (BrightRoll) and mobile (Flurry) programmatic platform, could attract the attention of a telecom giant such as AT&T as was the case with Verizon and AOL. AOL’s mobile and video advertising technology was the primary draw for Verizon, as it looked to capitalize on two of the biggest trends in the media and advertising industry: 1) The shift of media viewing time from traditional media to mobile devices, 2) The move from manual digital ad purchases to programmatic buying.

However, as the company has not yet released any official statement on the subject, the recent news is mostly a rumor. Investors, on the other hand, are hoping that the news is true and it was reflected in the stock price spike that recently happened in the company. We currently have a $35.86 price estimate for Yahoo, which is inline with the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

Notes:
  1. Yahoo Board to Weigh Sale of Internet Business, December 1st 2015, www.wsj.com []