Yahoo! Initiates Private Equity Strategy

This is an update to an article originally published on 8/22/12. Read the original article here: http://sumzero.com/106.

While I do not typically peddle Eric Jackson's commentary, I thought he put out a good note on Yahoo! the other day regarding the hiring of Jackie Reses. He believes she brings a private equity mindset to the Company, and will prove instrumental in Marissa Mayer's turnaround strategy:

"She’s coming to Yahoo! from Apax Partners, so she definitely brings a private equity mindset to Yahoo! Remember all those PE firms who were circling Yahoo! last Fall, salivating at the chance to buy the company cheap to then restructure it? Well, Yahoo! shareholders are going to see Reses oversee the same high-quality scrub of the company that PE would have provided without selling out to the PE pirates on the cheap. Marc Andreessen was one of the guys who wanted to buy Yahoo and then shrink it. He famously advised Mayer after she got the job to turn around and fire 10,000 people at the company. That’s pretty radical. Prepare to see Reses take a very long hard look at the organization and do the best thing to match the strategic direction that Mayer wants to lead it."

"Reses spent 7 years at Goldman Sachs (GS) and she made a lot of fans while she was there."

Source: http://www.forbes.com/sites/ericjackson/2012/09/21/the-most-unsung-great-hire-marissa-mayers-made-so-far/

Meanwhile, last Wednesday, Yahoo! announced the closing of its transaction with Alibaba to sell half of its 40% stake back to Alibaba for total after-tax proceeds (including $550MM to end a technology and IP license agreement) of $4.3B cash and $800MM of Alibaba preferred stock. The transaction valued Alibaba Group at approximately $35.25B, of which Yahoo! retained 23% (the transaction was accretive due to the buyback). Concurrently, Yahoo! announced that it would return $3B of the after-tax proceeds to shareholders but did specify how.

I've updated my current valuation and base-case mid-2015 valuation analyses as follows (please see attached as well):

Original....current FV = $18.67, mid-2015 FV = $23.32, and mid-2015 target price = $38.01
Update #1....current FV = $19.49, mid-2015 FV = $22.10, and mid-2015 target price = $31.01
Update #2....current FV = $19.49, mid-2015 FV = $24.10, and mid-2015 target price = $35.48

The difference between the original current FV and the udpated current FV is explained by, higher-than-anticipated Alibaba sale proceeds and a $12 Yahoo! Japan share price versus $10.96 previously.

In my original mid-2015 valuation work, I assumed Yahoo! would use 100% of its non-core assets for buybacks. For my updated analysis, I assume Yahoo! uses 25% of its non-core assets for acquisitions, or $4.68B - Update #1 assumes the market values the acquisitions at 50% of the purchase price while Update #2 assumes 100%.

The $3B return of capital should appease market concerns of a "big splash" acquisition at least in the near-term, though the threat of a value-destructive acquisition will likely keep a lid on the stock price for the foreseeable future.

Ironically, from a long-term perspective, the longer the market views a value-destructive acquisition as a threat, the more time Yahoo! has to repurchase stock at attractive valuations. Even assuming $4.7B of acquisitions as I do in my updated analyses, Yahoo! will have just over $14B available for buybacks over the next three years - a significant sum better deployed at lower prices.

You can read the original article here: http://sumzero.com/headlines/106.

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