With Yahoo exploring a separation of its core business, the world may soon know what the company — minus its lucrative stake in Alibaba — is worth.
As of Wednesday, that figure is a negative (yes, negative) $13 billion.
How can a company that has $4.5 billion in revenue and one billion users be worth less than zero?
Let’s walk through the numbers.
The value of Yahoo’s stake in Alibaba is $32.5 billion and its stake in Yahoo Japan is $8.6 billion. The company’s net cash — or cash minus debt — is $4.2 billion. All told, that is $45.3 billion.
But stock market investors are assigning a valuation of $32.5 billion, based on Wednesday’s trading. The news that Yahoo was halting a spinoff of its stake in Alibaba, the Chinese e-commerce giant, choosing instead to explore a spinoff of Yahoo’s core Internet operations plus its stake in Yahoo Japan, sent shares lower, widening that gap.
Investors are being punitive in part because of uncertainty. Spinning off the Yahoo core business and Yahoo Japan is projected to be even more complicated than the original plan to divest Alibaba. It could take another year or more and may still carry a tax liability, albeit a smaller one because the asset is smaller.
Mark May, an analyst with Citigroup, downgraded his rating on Yahoo in anticipation of the execution risk.
Investors were also disappointed that the core business will still be run by the current management team, led by Marissa Mayer, according to Brett Harriss, an analyst with Gabelli & Company. Before Ms. Mayer took over as chief executive of Yahoo in 2012, the company had earnings before interest, taxes, depreciation and amortization, or Ebitda, of $1.4 billion, a figure projected to be $929 million this year.
It may have declined, but with that much Ebitda, Yahoo’s core business cannot be worthless.
On average, analysts value Yahoo’s core based on five times projected Ebitda – some a little higher, some a little lower. That yields a market capitalization of $4.6 billion if Yahoo were an independent company. Tack on the 35 percent stake in Yahoo Japan, worth about $8.6 billion, and you’ve got a $13.2 billion business that could be spun out.
If the transaction ultimately is taxed, the bill would be a lot smaller for the Yahoo core plus Yahoo Japan entity than the original plan to spin off its Alibaba stake. Assuming a 41 percent tax rate, as CRT did in Wednesday’s note, Yahoo would pay $5.4 billion in taxes, versus $13.3 billion in taxes if it spun out Alibaba – potential savings that amount to $8 billion. That’s an extra dollar back for each share outstanding. Yet, interestingly, the stock lost 45 cents a share Wednesday.
It is clear that the turmoil surrounding Yahoo is not over. Only when it has a spinoff or a sale will the market truly be able to put a price tag above zero on its core business.
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