Tuesday, September 13, 2011

Yahoo Worth More Than $20/Share!

Yahoo has been an interesting 'stub' trade, or sum-of-the-parts play by some prominent value investors.  Most recently, David Einhorn of Greenlight Capital took a large stake and then dumped it when he was frustrated by the problems caused by Yahoo's handling of the Alibaba/Alipay situation.

This story got a bit interesting again as the board fired Carol Bartz, the CEO brought in to fix up Yahoo a couple of years ago.

And then we get Daniel Loeb of Third Point (an $8 billion assets under management hedge fund) taking a 5.1% stake in Yahoo for the same reason that Einhorn did; the value of Yahoo when looked at as the sum of the parts is far higher than the current stock price  (5.1% is worth $918 million or so and that constitutes more than 11% of Loeb's AUM, so that's a serious position).

I do own a little bit of YHOO too but I'll use Loeb's numbers to illustrate the value here.  It's not often that we get a detailed look at how a prominent, usually very secretive and private investor sees value in a specific situation.

From his letter to YHOO's board, his take on the value of YHOO stock is:

 Value per share of YHOO:
  $2.49  tax adjusted net cash
  $3.10  stake in Yahoo Japan (after tax)
  $5.24  stake in Alibaba  (after tax)

Deducting the value of these holdings from the current Yahoo stock price (or current at the time of this letter, September 8, 2011) of $13.61 leaves $2.78 as the implied value of Yahoo's core business.  This is a valuation of 2.2x EV/EBITDA which is very cheap.

If the business is refocused and fixed, it can be worth 7.0x EV/EBITDA giving the whole value of Yahoo shares of $19/share, or 40% higher than the current price.

If they can distribute their Asian holdings in a tax efficient manner, there may be an additional $3-4/share to be realized putting the value of YHOO shares into the mid-20's.  

The letter talks about the medium-term potential of Alibaba, which can add another $5.00/share in value over time as Alibaba's business in China continues it's high growth.

Loeb is right that the board of Yahoo seems to have mishandled a bunch of things, and the board should probably go.  Everything from rejecting Microsoft's $31/share bid to hiring the wrong person (Bartz), to publicly announcing full support for this wrong person to the sudden firing by phone of this wrong person etc...

The board may or may not go, but I do think the pressure is on; there is a lot of pressure to do something to increase value to shareholders and this Bartz fiasco has certainly accelerated whatever must happen eventually. 

I do think this is pretty interesting.

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