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All Eyes on Yahoo Buyout, Not Earnings

Stocks in this article: YHOO

BOSTON ( TheStreet) -- Yahoo (YHOO) reports third-quarter financial results after the close of trading today, though investors won't be focused on earnings or revenue. Instead, they'll be looking for clues about the potential sale of the company.

Over the past few weeks, there have been rumors of a potential tie-up with AOL, a buyout from Microsoft and even a takeover by co-founder Jerry Yang. The news that really propped up the shares was a comment from Alibaba CEO Jack Ma saying he's extremely interested in buying out Yahoo.

Yahoo, which owns a 40% stake in the Alibaba Group, should be worth nearly $17 to $22 per share in a takeout, according to Bank of America-Merrill Lynch analyst Justin Post. He says Yahoo's assets alone are worth at least $12 a share, with most of the value coming from the Alibaba Group stake, estimated to be worth $32 billion. Based on Post's analysis, Yahoo's core business represents just 20% of the stock value.

The key asset in the group is Alibaba's subsidiary company Taobao, the leading e-commerce company in China, and conservatively estimated by Post to be worth $25 billion (or $5/share). Yahoo Japan (of which Yahoo owns a 35% stake) is likely to be sold off soon, and estimated to be worth nearly $20 billion (or $3.30/share).

Add in nearly $2 per share in cash, and it's no surprise that investors have bid up the stock (up 16% since Oct. 1), hoping a potential suitor will unlock the true value of the company.

Post's estimates seem to be in line with many of the big hedge funds.

Hedge fund manager Dan Loeb of Third Point said in a letter to Yahoo's board in September that he was "convinced that Yahoo is grossly undervalued." In his letter, he goes on to provide a breakdown of his analysis, saying the core business for Yahoo was being valued at an implied $2.78 per share, or 2.2 times 2012 EBITDA.

"With more effective and focused management, one could realistically envision a re-rating to at least 7 times 2012 EBITDA, driving a target of over $19 per share," Loeb says.

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