Yahoo YHOO
May 01, 2015 - 5:51pm EST by
byronval
2015 2016
Price: 42.50 EPS 0 0
Shares Out. (in M): 948 P/E 0 0
Market Cap (in $M): 40,000 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Sum Of The Parts (SOTP)
  • Arbitrage
  • Stub

Description

Yahoo presents a compelling opportunity to create the stub and capture 13% arb-like returns in 5-6 months generating a fully hedged IRR of ~30%.

The sum-of-the-parts math is displayed below. Current Yahoo share price is $42.40. On an undiscounted, tax-free basis Yahoo has assets totaling $47.18 – NOT including the core business.

The table at the right shows the SOP with realistic discount assumptions. I assign a 10% discount to the BABA stake because I expect that to be the outside limit of where SpinCo trades versus BABA. SpinCo will be a large, liquid entity greater than $30bn and should not trade at a greater than 10% discount to BABA, as I expect the ultimate upstream merger by BABA can be executed at a 5% discount.  SpinCo shareholders should not accept any discount above that given how liquid the entity will be.

I think that a 20% discount is reasonable for YJ. Yahoo management announced hiring financial advisors to assess alternatives for Yahoo Japan and from the tax diligence I have done, I believe that they can replicate the tax efficient BABA transaction. Therefore, I think the 20% is conservative but will keep it there until management explicitly announces its intentions.

A 10% discount is assigned to existing cash and $6bn to the core business. Each $1b of value in the core operations equates to roughly $1/share. I believe that with patent value and significant cost cutting potential, $6bn is a reasonable value, but you can plug in your own estimate if you disagree. There is upside to that number. Once Yahoo spins off BABA, attention will shift to the core and management will have to generate sources of value. They have already telegraphed patent assets in their 1Q14 call. I believe there is upside to the $6bn value.

At these adjusted values, the SOP for Yahoo is $47.78 – which is 13% upside from today’s price. We expect that the BABA spin will be executed by October at which point value should be realized.

In a very competitive market, this appears to be one of the more interesting trades I have come across. Interestingly, the spread has opened up by 4-5% in the last few weeks which makes this a nice entry point.

Risks include management making value destructive acquisitions and pursuing a growth strategy over one of cost rationalization. My view is that the risks for a large acquisition are diminished as public/activist pressure will make that a very uncomfortable route for a management team focused on reputation. Additionally, management has committed to an incremental $2bn buyback.

 

Sum-of-Parts: undiscounted and adjusted 

  Value per/share % of Val                Disc. Value per/share % of Value dsdds
BABA 31,159 $32.86 78%   90% 28,043 $29.57 70%  
JPY  8,123 $8.57 20%   80% 6,499 $6.85 16%  
BABA+JPY 39,282 $41.42 98%     34,542 $36.42 86%  
                   
Net Cash 5,463 $5.76 14%   90% 4,773 $5.03 12%  
TOTAL  44,745 $47.18 111%     39,314 $41.46 98%  
YHOO Current 40,200 $42.39       40,200 $42.39    
Implied Value to Core -4,544 -$4.79       886 $0.93    
                   
Core Business 6,000 $6.33 15%     6,000 $6.33 15%  
TOTAL VALUE 50,745 $53.51 126%     45,314 $47.78 113%  
                   
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

BABA Spin, YJ decision, rationalization, IP monetization 

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