Yahoo’s board is desperately trying to come up with something, anything, that will allow them to save a little face before they rinse their hands of Yahoo and move on.The options the board has explored include everything from an outright sale to a yard sale (point at the asset you like and name a price) to a “leveraged recapitalization” to a “cash-rich split-off” that would monetise the company’s Asian assets.
The last of these, the “cash-rich split-off,” has gotten many shareholders excited, so it’s worth explaining exactly what it is.
Before we do that, though, we should once again express our disappointment and frustration at the priorities of this process on behalf of Yahoo users and employees. In all of these various escape plans, Yahoo’s core business, which is still immensely powerful and valuable, is basically being left for dead.
Specifically, the board has fired the company’s CEO and hired an interim CEO to babysit the business while the board conducts its endless financial engineering explorations. Meanwhile, with every day that goes by, Yahoo loses another 24 hours in the race to save itself before it’s too late. If Yahoo were a tiny property, or a grab-bag of small, troubled assets, this would be tolerable. But Yahoo is still one of the world’s biggest and most powerful Internet properties, with a global audience of more than 700 million visitors a month. So the fact that revitalizing it appears to be the board’s lowest priority is beyond depressing. Especially when the solution is so obvious.
(What’s that solution? Focus on the most promising part of the business, use cash and cash-flow to buy properties and technologies that bolster it, hire more great people, and become the most powerful content producer and distributor in the world.)
But, anyway, on to the “cash-rich split-off…”
The point of the “cash-rich split-off” is to allow Yahoo to sell its Asian assets without incurring huge capital gains taxes. The estimated value of these assets is ~$20 billion, and Yahoo’s cost-basis is very low. So if Yahoo had to pay 35% tax on the sale, it would have to turn over some ~$7 billion to the government. The “cash-rich split-off” mechanism is designed to allow Yahoo to sell its Asian assets without paying the taxes.
The way a “cash-rich split-off” has to work is this:
A third party, in this case Alibaba and/or private-equity firms, would have to put together a new “company” comprised of:
- Cash (up to 66% of the value of the company), and
- Operating assets (businesses, licenses, or other assets worth 33% or more of the value of the company).
This company would then be swapped for Yahoo’s Asian assets.
Yahoo would have to own the entity for at least two years, but it would be able to use the cash received in the entity immediately. And its the ability to use this cash that gets some Yahoo investors so excited.
Yahoo investors want Yahoo to use the cash received in a “cash-rich split-off” to buy back vast quantities of Yahoo stock.
Two analysts have explained the “cash-rich split” in detail in recent days: Ken Sena of Evercore and Eric Jackson of Ironfire.
Ken Sena thinks Yahoo could use the ~$11 billion it would get in such a deal and its existing cash to shrink its share count from 1.3 billion to about 550 million. This, Sena estimates, would drive Yahoo’s value to $25 per share.
Eric Jackson has even higher hopes. Jackson wants Yahoo to borrow even more cash on top of the cash it gets from the cash-rich split deal and shrink its share count to 350 million. This, Jackson estimates, should drive Yahoo’s value to $41 per share.
So, what’s the catch?
There are two catches.
One is that a deal like this would be very complex, especially if it involves many different players (Alibaba, private-equity firms, etc.).
Another catch is that 33%+ of the value of the swap entity has to be composed of Alibaba assets that Yahoo may not want. Apparently, the entity can include some third-party acquisitions, such as Hulu, AOL, and/or Business Insider, which Yahoo might have more use for than existing Alibaba assets. But acquiring and delivering these assets would make the deal even more complicated.
THE BOTTOM LINE
If Yahoo’s Asian assets really are of no strategic value, which everyone seems to agree they are not, then it’s fine for the company to sell them off, via this mechanism or any other.
(For this mechanism to be a better plan than just selling the assets for cash would depend entirely on the value of the other assets received in the swap. If Yahoo got, say, Hulu, AOL, Business Insider, and a bunch of other properties it wants in the swap, along with all that cash, then the “cash-rich split-off” might make sense. If the assets are just a bunch of Alibaba licenses that don’t help Yahoo much, however, they’re probably better just selling the assets and paying the taxes.)
And if Yahoo does sell off its Asian assets, it would be fine for the company to use some or all of the cash received to shrink its share base.
But both of these actions–selling the assets and buying back stock–should be secondary concerns.
The company’s main focus should be on revitalizing its core business.
And to do that, the company needs to hire an excellent, permanent CEO.
So the sooner the board focuses on that challenge, the better.
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