Could Yahoo! Sale of Core Assets Push Investors to Sell?

Yahoo! stock may face yet more trouble, according to one analyst.
By Anders Keitz ,

Editor's Note: This article was originally published on Real Money at 2:16 p.m. on July 11.

Yahoo! (YHOO) is in the process of weighing several final bids for its core Internet assets. The sale aims to separate the company's Alibaba (BABA) - Get Report stake from Yahoo's operating business, a move that is "essential to maximizing value for our shareholders," the company said in a statement.

But some analysts believe that a sale of the core assets could create risks, namely that investors could likely "sell the news." Shares slipped slightly before rebounding during the trading session Monday following a stock rating downgrade by SunTrust Robinson Humphrey to neutral from buy.

SunTrust analyst Robert Peck said in a research note Monday that a final decision on the core sale could come in around July 18. Peck noted that there were a number potential bidders in the third round, including private equity firms like TPG, Advent and Sycamore Partners/Vector Capital; two telecommunications giants -- Verizon (VZ) - Get Report and Trifecta Stocks holding AT&T (T) - Get Report ; and a hybrid group led by Quicken Loans founder Dan Gilbert and backed by Warren Buffett.

SunTrust is expecting about $6 billion in total for the core sale.

Regardless of which group wins the bid, the SunTrust analyst said while he expects a positive result, it could be a catalyst for investors to "sell the news" based on several reasons.

While the deal is anticipated, Peck said it may have higher contingencies given recent disclosures. He pointed to a recent Re/code report which said that whoever buys the Internet pioneer's assets might have to pay Mozilla annual payments of $375 million through 2019, if it does not want to work with the buyer and walks away.

On CNBC's Squawk Alley Monday, Peck said the Mozilla liability could put pressure on the price and "could actually take bids down going forward from here."

He continued to say that the bulk of the value is attached to the Alibaba stake.

"I don't think investors understand that these shares are what they called hooked," said Peck on CNBC, "Which means that if BABA were to ever buy them and they ever do a dividend or a something like that in the future, there is going to be tax consequences." Those tax consequences would bring the net asset value of the shares down.

Peck also said that he thinks Alibaba would want to do that depending on the discount to net asset value, adding that he did not see that happening in the near term, but perhaps in 2017. But more importantly, he said, that means the value of the shares in Yahoo! have to be lower.

"Every $1B increment only equals $0.65 share in post-tax proceeds, which pales versus the value that can be 'unlocked' from the Asian investments (which are complicated processes)," Peck wrote about the core sale in a research note Monday.

SunTrust believes that Verizon is the frontrunner for the core assets, "as it can generate the most synergies from the core."

In the last round of bidding, however, Verizon's bid of $3.5 billion was on the lower end, with others coming in at or above $5 billion.

But Peck mentioned that there is a chance for multiple winners. In that situation, the various assets could be sold in separate, but simultaneous, transactions.

Overall, Peck said Yahoo! can still be an adequate investment but investors must acknowledge the investment case is predicated on "the core sale being completed shortly; the subsequent liquidation of [Yahoo! Japan]; Alibaba buying back shares at an attractive NAV for Yahoo!; and patience to see the whole process through 2017."

Given the uncertainty of the future, he believes the stock is no longer a buy.

Loading ...