Now That 'Core' Yahoo! Has Been Sold, Alibaba Might Come Knocking

If Chinese web giant Alibaba is interested in buying back its own shares -- and it should be -- Yahoo! could be significantly undervalued on a sum-of-the-parts basis.
By Eric Jhonsa ,

With the sale of Yahoo!'s (YHOO) "core" business to Verizon having finally been announced, the company can now turn its attention to monetizing the assets that account for the lion's share of its valuation. And while nothing is set in stone, there are some realistic scenarios that could lead to further value creation.

At the time of this article, Yahoo! carried a roughly $36.4 billion market cap. The company's 384-million share stake in Alibaba (BABA) - Get Report is currently worth $31.9 billion, before counting any tax liabilities related to a sale of the shares, and its 35.5% stake in Yahoo! Japan (YAHOF) has a pre-tax value of about $8.8 billion.

Yahoo! also had $7.7 billion in cash and marketable securities at the end of June, partly offset by $1.3 billion in convertible debt. It stands to reap $4.8 billion in pre-tax proceeds from the sale of its core business to Verizon -- on a conference call, CFO Ken Goldman said post-tax proceeds will be close to $4.8 billion -- and could obtain several hundred million from the sale of its "Excalibur" patent portfolio, which isn't part of the Verizon deal.

Nominally, all of Yahoo!'s assets have a face value of around $56 billion, or $59 per share. Realistically, taxes and other considerations lead them to be worth less... but they might still be easily worth more than the $38.32 per share that markets are currently granting them.

In Monday's Verizon announcement, Yahoo! said it plans to return "substantially all of its net cash to shareholders." Following the Verizon deal's closing and a patent sale, the company's net cash balance could be north of $11 billion, or $11.55 per share.

Meanwhile, as many have pointed out, the sale of core Yahoo! opens the door to Alibaba trying to acquire Yahoo!'s remaining assets for the purpose of retiring its Alibaba share (and thus boosting Alibaba's EPS). When previously asked whether Alibaba is interested in buying back Yahoo!'s share, vice chairman Joseph Tsai said his company is open to a deal "if it is very significantly accretive to our shareholders."

And a deal could be quite accretive to Alibaba shareholders, given that Alibaba can bid less than face value for Yahoo!'s Alibaba shares and still offer more than what Yahoo! would get from any other buyer. That's because any buyer other than Alibaba would have to account for the tax liability -- estimated to be around 38% -- attached to any sale of the shares.

Back in December, Bloomberg's Matt Levine observed Alibaba could issue 326 million shares -- currently worth $27 billion, or about $28.50 per Yahoo share -- to Yahoo! shareholders in exchange for Yahoo!'s 384 million Alibaba shares, and that Yahoo! shareholders would still come out ahead, given the tax discount attached to Yahoo!'s stake. With Alibaba possessing $17.3 billion in cash at the end of March and having a healthy credit profile, the company could also pay for Yahoo's stake with a mixture of cash and stock, thereby getting a larger EPS boost. Plenty of possibilities clearly exist.

This still leaves the matter of the Yahoo! Japan stake, which Alibaba might not be interested in. SoftBank (SFTBY) , which owns 36.4% of Yahoo! Japan directly and another 6.6% through its SBBM Corp. subsidiary, is a natural buyer. Given the potential value of an Alibaba deal, Yahoo could just choose to sell its Yahoo! Japan stake directly, and absorb the related tax bill. Based on Yahoo Japan's current valuation, a sale could yield post-tax proceeds of $5.4 billion, or $5.70 per share. There's also a lingering possibility that Yahoo! could lower any Yahoo! Japan tax bill through a spin-off transaction.

Yahoo! could be worth around $45 per share -- roughly 17% higher than their current level -- even if one assumes its Alibaba stake gets sold back to Alibaba at a discount, and its Yahoo! Japan stake is sold and fully taxed. And one can count on Starboard Value and the other activist investors who now have a big say in how the company acts to make sure Yahoo! tries to get every possible cent from its assets.

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