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Nut a problem

9 September 2015 By Robert Cyran

Yahoo’s headaches stretch beyond Alibaba. The U.S. authorities will not bless the Internet company’s plans to separate its $23 billion Alibaba stake in a tax-free transaction. Yahoo may still try and move ahead, hoping it won’t owe the government money if it proceeds, but the hefty discount attached to this stake implies the plan is troubled – as is the company’s core business.

To see the problem, try unpicking Yahoo’s $29 billion market capitalization. The Web portal’s operating business is projected to make EBITDA of just over $1 billion next year. Put that on the same 8.5 times multiple of enterprise value accorded to IAC/InterActiveCorp, the owner of Tinder. Adjusting for cash and securities, that implies an equity value for the core business of just over $14 billion.

Then, its slug of equity in Yahoo Japan is worth about $5.4 billion after taxes at current market prices. The remnant is the 15.3 percent holding in Chinese e-commerce giant Alibaba.

That implies the market is valuing this stake at a bit over $9 billion. However, the nominal value, based on Alibaba’s share price, is $23 billion.

That’s a roughly 60 percent haircut – yet the tax authorities would only claim about 30 percent of the Alibaba stake at most. That suggests Yahoo boss Marissa Mayer has a second problem.

If the Alibaba stake is indeed worth about $16 billion after paying a full slug of taxes, and Yahoo Japan is worth $5.4 billion, that means the company’s heart is worth less than $8 billion. The more Yahoo’s stock slides, the more investors are simply saying the company’s problem isn’t whether this deal is or isn’t tax-free, it’s that Yahoo’s rump isn’t worth much.




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