Yahoo has three “hidden” assets that could significantly drive up the value of its business, according to SunTrust analyst Robert Peck.
In a note published Wednesday, Peck argues the valuation of three Yahoo-owned assets — Yahoo Japan royalties, patents, and real estate property — are not well understood by investors and could have “material upside” to the future bids for the company.
Yahoo’s currently seeking offers for parts of its business, including its core internet properties and ownership stake in Yahoo Japan. Peck last week ascribed a $6 billion to $8 billion price tag to it, but he believes the three “hidden assets” could raise the value for the following reasons:
- Yahoo Japan royalties: Yahoo has an agreement to receive 3% of Yahoo Japan’s gross profits forever, but Peck says most investors have been unclear what happens upon a sale or change of control, believing the contract remains in private. But the contract is publicly available and the language indicates the agreeement will stay in place even after a sale. Last year, Yahoo Japan royalties brought in $90 million. Peck believes the perpetual royalty payment is worth close to $1 billion. (Yahoo Japan is a joint venture and Yahoo US owns a minority stake; the largest owner is Softbank.)
- Intellectual property: Peck says many investors are not aware that over 2,000 of Yahoo’s 6,000 patents are publicly available on the US Patent Website. Yahoo’s disclosed in its last earnings call that it’s looking to generate $1 billion to $3 billion through the sale of non-strategic assets and real-estate, but Peck believes the value of its patents alone could fetch more than $3 billion in total, if sold to a large enterprise or a group of companies.
- Real estate property: Yahoo currently owns about 1 million square feet of office space and land around its Sunnyvale headquarters. Peck believes Yahoo could make an additional $60 million a year by renting out this space, making the property worth an additional $1 billion in value.
“Based on the upside potential in these assets discussed above, we think the ultimate winning bids could come back above our range,” Peck concluded, as he raised the price target of Yahoo’s stock from $40 to $44 per share.
But Peck noted that the bids coming in the first deadline, reported to be set on April 18, will be lower, as potential buyers will make lowball offers just to pass the first round of the bidding process. Once they get to the next stage, bids could start rising, especially if there’s a number of bidders, he said.
Yahoo said in its last earnings call that it would listen to offers for parts of its business, following pressure from activist investors to make big changes to its overall business. More than 40 companies are reported to have expressed interest in buying parts of Yahoo, including Verizon, Google, and several private equity firms.
Meanwhile, activist investor Starboard Value has submitted a group of new board nominations last month, kicking off a proxy battle to replace Yahoo’s entire board.
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