NEW YORK (TheStreet) -- There's probably no one in Corporate America who is more respected for his financial prowess than John Malone, the billionaire who controls Liberty Media (LMCA) and all but created commercial cable-television. Along with Liberty CEO Greg Maffei, Malone is known to employ ridiculously complex transactions to unlock value for his assortment of media and entertainment companies, all the while avoiding nettlesome taxes.
Many -- including me -- have wondered what someone like Malone would do if he was in charge of Yahoo! (YHOO) . There's a lot of potential in Yahoo! today, which is a nice way of saying that its collection of assets have been mismanaged for years by its assortment of directors and CEOs.
What would John Malone do with Yahoo! if he ran it? We can't know for sure, but let me make some guesses.
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Barron's wrote an interesting article a couple of weeks ago talking about how Liberty Ventures (LVNTA) had recently spun off its 22% stake in TripAdvisor (TRIP) to its holders. This transaction was tax-free, thanks to a ruling by the Internal Revenue Service. In doing this, it also put an operating asset (BuySeasons) into the new entity called Liberty TripAdvisor Holdings (LTRPA) , which is now worth about $2.5 billion.
At the moment, TripAdvisor has a market cap of $13.2 billion, meaning a 22% stake is worth $2.9 billion. Liberty TripAdvisor has a market cap of $2.5 billion today, so there's about a 16% discount between the spun-off value and the "true" value of the stake.
But it's worth it for Malone to have this stake as a separate entity. He can borrow against its value if he wishes. He also takes it away from mixing it up with other Liberty-owned assets that might disguise the overall value of the collection of assets. He forces the market to assign proper values to his individual assets.
He's also planning to do this with the stake he owns in Charter Communications (CHTR) in the coming weeks.
Today, Yahoo!'s stock encompasses the core business of Yahoo!, the cash that sits on its balance sheet (probably over $10 billion now thanks to last Friday's Alibaba (BABA) stake sale in the initial public offering), Yahoo!'s remaining 16.3% interest in Alibaba, and its 35% stake in Yahoo! Japan.
If Yahoo! spun off its Alibaba stake in a similar fashion to Liberty TripAdvisor (with a similar discount to the underlying Alibaba), the tax-free value of that spun-off company would be worth $30 billion. If it did something similar with the Yahoo! Japan stake, it would be worth $6.5 billion (after assumed discount to the underlying value).
Including the $10 billion of cash, all those assets together have a value of $46.5 billion. What is the Yahoo! core business worth? It's likely still worth between $5 billion and $10 billion if it was valued on its own. Let's take the midpoint of that range, which is $7.5 billion.
That means you have a combined value of assets of $54 billion.
If you assume that Yahoo! has brought its share count down to 900 million from 1 billion, where it was at the end of June, the per-share price of Yahoo! "should" trade at something like $60 per share.
Instead, it trades at close to $40 per share today. It certainly would be a lot higher if John Malone was running the show.
Malone might also look to borrow against the value of the Alibaba stake, which would trade separately and then use the cash to do a massive buyback of the remaining shares.
Another technique Malone has used in the past is something called a "cash-rich splitoff." This would involve swapping both the Alibaba stake and the Yahoo! Japan stake back to its owners. What Yahoo! would get back in a swap would be up to two-thirds cash and then one-third in value of some operating assets, which Alibaba or Softbank would give to Yahoo! or buy for them. Assuming that the IRS signed off on it, the swap would be also tax-free.
However, in order to do this all sides have to agree on a price and what assets would be coming back to Yahoo! in a transaction. Also, there has been speculation that Alibaba management might be nervous that going through with such a transaction might raise the hackles of U.S. politicians who might want to make an issue of a large Chinese company helping a U.S. company avoid taxes.
But the spinoff idea has none of those challenges. It is what John Malone would do -- and it would lead to a 50% increase in the stock price.
At the time of publication, the author was long YHOO, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates YAHOO INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate YAHOO INC (YHOO) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, solid stock price performance, good cash flow from operations, expanding profit margins and reasonable valuation levels. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: YHOO Ratings Report