Probability of Alibaba (BABA) Buying Yahoo! (YHOO) is Increasing - Analyst
Shares of Yahoo! (NASDAQ: YHOO) are getting smacked Thursday (-8.6%) amid disappointing quarterly results from Alibaba (NYSE: BABA) (-9.6%). Yahoo! fortunes are closely tied to Alibaba given its massive stake, which it now plans to spin-off into a separate publicly traded entity.
While lower today, the spinning-off of the Alibaba stake is seen as unlocking loads of value for Yahoo! shareholders. Today, Needham & Company analyst Laura Martin took it a step further and said the spin-off raises the probability of an acquisition of Yahoo! by Alibaba. According to Martin, the market is missing this increased likelihood.
The analyst cited the following:
- Our understanding of Spin-Co tax restrictions is that Spin-Co must remain outstanding for at least 2 years or the $14B of tax savings could be nullified by the IRS.
- Going into the open market to buy 16% of BABA’s shares would require paying a premium.
- In our view, any company (including BABA) that might buy YHOO today would be getting the core business for "free" and, after spinning off YHOO Japan and the core business, we believe it could potentially purchase 16% of BABA at a discount.
- YHOO owns about 16% of BABA shares, and in our view Spin-Co will create a near-perfect substitute to the BABA shares in the marketplace. If the discount gets too big between the 2 entities, traders may likely sell BABA shares short and buy Spin-Co to close the gap.
- Therefore, it follows that if BABA (or any company) wants YHOO’s BABA shares, it would have to buy YHOO before Sept 2015 (the planned spin date) or wait 2-3 years.
- If any company thinks BABA shares will rise over the next 3 years, we believe that buying YHOO could be seen as the cheapest way to buy them.
- BABA has a $244B market capitalization, which is 5.5x larger than YHOO’s $44B.
The firm reiterated a Buy rating and $55 price target on Yahoo, saying the stock also offers downside protection. "YHOO’s core business is worth 4-7x its 2015E EBITDA of $1.2B, this suggests $5-8.4B of valuation upside potential, suggesting additional 18-26% upside potential to current YHOO shareholders," she said. "We think this could also be thought of as buying BABA shares at a discount, after selling the core business for $5-8B."
For an analyst ratings summary and ratings history on Yahoo! click here. For more ratings news on Yahoo! click here.
Shares of Yahoo! closed at $46.46 yesterday.