If you’ve been paying attention at all to Yahoo, one thing you may have heard (repeatedly) is that the company’s core businesses — Yahoo Finance, Sports, mail, news, etc. — are worth less than $0.
That’s because Yahoo owns a 15% stake in Alibaba. At today’s market cap, that’s ~$32 billion. It also owns 35.5% of Yahoo Japan, which is worth $9.7 billion.
(Yahoo Japan is a standalone public Japanese company.)
Yahoo’s market cap is ~$33 billion despite the fact that the “Asian assets” (as they’re known) of Alibaba and Yahoo Japan are worth more than $41 billion.
Therefore, if you can do maths, you might say that Yahoo’s core business is worth negative $8 billion.
It is, of course, more complicated than that. The Asian assets would be hit with a tax bill if Yahoo were to simply sell them off, so they are discounted. Additionally, Yahoo’s core business is discounted because Yahoo CEO Marissa Mayer has failed to do anything with it.
So what’s the real value of Yahoo’s core business?
Robert Peck, analyst at SunTrust, says it’s a lot more than negative $8 billion. He pegs its value at $6-$8 billion, which is 5X a projected 2016 EBITDA estimate. (EBITDA, which is short for earnings before interest, tax, depreciation, and amortization, is a broad measure of a company’s profits.) There will also be a tax hit for selling this core businesses, so the net proceeds for what remains of Yahoo will be something like $4-$6 billion, according to Peck.
Peck thinks Yahoo ultimately will be selling itself either to a private equity firm, or a strategic buyer like Verizon in the first half of 2016. He thinks investors are sick of dealing with Yahoo and that the board wants to avoid a big fight with investors. Selling itself is the way out of both of these things.
So how does Peck get to a $6-$8 billion?
He has an estimate for cost savings through layoffs and focus. Peck sees a 15%-30% reduction in headcount at the company with Yahoo shutting down some offices and focusing on high growth investments that deliver a return. All in Peck thinks there are at least $400-$900 million in cost savings available to Yahoo, which will improve its bottom line.
Peck doesn’t mention this in his analysis, but we would add that Yahoo’s core properties like Finance, Sports, and News are still big, with heavily engaged audiences.
Tumblr is not as sexy as Snapchat, or even Twitter, but still has great potential.
There is a good web media business in Yahoo, and the right management team should be able to figure out how to turn it into a modestly growing business instead of what it’s been, which is a flat/declining business.