Yahoo’s Asian sale resistance looks futile
Yahoo’s resistance to selling its Asian business is futile. The Internet company lacks direction. Its stock now trades at half the spurned $31-a-share offer from Microsoft two years ago. Revenue has stagnated. It isn’t paying a dividend. And there’s friction with its partner in China. Yahoo would be worth more carved up and refocused.
For Yahoo, there’s Asia and everything else. Its 34 percent of Yahoo Japan is worth $7.1 billion at current market values. It also has a 40 percent chunk of Alibaba, a group that owns Taobao and Alipay, China’s high-growth answers to eBay and PayPal. It’s hard to pin down Alibaba’s value because most of its subsidiaries aren’t listed, but the mid-point of analysts’ estimates is about $7.5 billion. At nearly $15 billion, the Asian businesses are about equal to Yahoo’s enterprise value.
Meanwhile, Yahoo’s own operations look set to produce $750 million of mostly advertising-based operating profit this year, based on first-half performance. It seems fair to put it on the same multiple as eBay and Google. Yahoo is a mess, but its margins will expand as cost savings from outsourcing search to Microsoft kick in. If so, that’s $8.7 billion to which the market ascribes little to no value.
There are more reasons to sell than hold in Asia. True, there’s probably growth yet to come. And waiting until Taobao and Alipay get floated makes sense. But these auction and payments businesses don’t really fit with Yahoo. Alibaba executives have publicly questioned the partnership’s value now that Yahoo farms out search. And sitting around and waiting for overseas partners to go public, especially when they’ve said they don’t have any plans to, isn’t much of a strategy. A sale appears inevitable.
What’s more, the tax issues related to a sale of the Chinese and Japanese assets may not be as big a problem as they seem. Alibaba said its offer to buy out part of Yahoo included “a specific plan to maximize the value of their remaining stake.” But even adjusting for any potential capital gains taxes related to unloading all the Asian businesses, Yahoo’s market discount to the sum of its parts is around 20 percent. That should be more than enough of a conglomerate discount to persuade Yahoo to sell, and give the resulting cash to its long-suffering shareholders.