Yahoo Mulls Asian Asset Swap; Risk Remains to the Downside

Yahoo (YHOO), beleaguered with poor performance from its domestic operations, is reportedly looking to shed some of its Asian assets in order to help prop up its stock in the midst of a massive price slide in the past few years (the firm had been trading north of $30 per share in 2007 and now is in the mid-teens). Though the news of an Asian-asset sale/spin-off continues to make headlines, we remain unimpressed by Yahoo’s core competitive position relative to Google (GOOG) and Facebook and think the proposed complex transaction related to its Asian assets is but a temporary, short-term cash boost and not a permanent fix to the firm’s structural problems. We are sticking with our long-term fair value range of $9 to $15 per share for Yahoo (3 year horizon), despite accounts that its Asian assets alone may garner a pre-tax value on the high end of this range. 

The complex deal that is best summarized as a tax-free swap of assets involves selling part of its stake in China’s Alibaba Group and its ownership of Yahoo Japan for more than $17 billion. Though such a transaction values the core of Yahoo’s business at about $2 per share based on its current share price, we’re not compelled to raise our fair value estimate for Yahoo, given the substantial risks involved in not only completing this complex arrangement but also considering the future potential use of such cash. We think an appropriate discount applied to this cash load (and/or the value of its Asian assets) is warranted as Yahoo will likely use such cash to fight off Google and Facebook in either a value-destroying acquisition or via internal development, the latter inevitably to be hindered by the exodus of talented leaders at the firm in previous months.

We’d only consider raising our fair value for Yahoo if management passes this cash directly to shareholders in the form of a one-time dividend (at which we’d put the firm under review), or if private equity comes in to take all of Yahoo out at an above fair-value price (at which we’d raise our fair value estimate to the consummated deal price). We believe the latter would be a much more amenable outcome to shareholders given the firm’s poor competitive position and lack of leadership at the top (it continues to lack a CEO).

Bain Capital, Blackstone (BX), Silver Lake, Microsoft (MSFT), and TPG are all reportedly to be involved and interested in taking a stake in Yahoo or buying the beleaguered search-engine firm outright. Silver Lake is reported to have offered $16.60 per share, while TPG is rumored to have offered as much as $17.60 per share. However, such involvement by these participants is not new news and has been well-known for months, and we believe is heavily reflected in the firm’s stock price. The risk to Yahoo, in our opinion, is more to the downside based on these “inflated” offer prices; our fair value estimate range, which captures the long-term intrinsic value of the firm and not a buy-out premium, considers the possibility that these deals may not go through.

For investors looking at the internet sector, we think Ancestry.com (ACOM) and Google (GOOG) present investors with much more attractive risk/reward profiles.