Approximately 3 weeks ago in a seemingly unrelated news item to Yahoo (NASDAQ:YHOO), Murphy Oil (NYSE:MUR) announced a plan to spin off its U.S. downstream subsidiary Murphy Oil USA into an independent and separately traded company. Murphy also authorized a special dividend of $2.50 per share for a total dividend of approximately $500 million and a share buyback program of up to $1 billion of the company’s shares of common stock. Finally, Murphy reaffirmed the plan to divest the U.K. downstream operations and stated it is continuing to review possible options with respect to selected assets.
So, how is this related to Yahoo? The hedge fund Third Point that pushed for changes at Murphy Oil also happens to be an investor in Yahoo and is pushing management to make changes and return capital to shareholders. The Murphy Oil spin-off and related announcements suggest Third Point has significant clout with management teams. This further suggests investors should look forward to the continued unwinding of Yahoo’s Asian assets supporting a higher stock price.
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For some background, Yahoo is Third Point’s largest holding. Daniel Loeb runs Third Point has been actively involved with Yahoo. After a proxy contest in Q1, the hedge fund ended up with a number of directors on the board providing oversight for management to return capital to shareholders and monetize some of their Asian assets.
In recent history, Yahoo (NASDAQ:YHOO) has been a value trap without proper catalysts in place. Thus, the market hasn’t been willing to recognize the value in shares. However, this year Yahoo has a new CEO and the addition of a big investor, Third Point, voicing shareholders’ concerns.
As promised, on May 20 Yahoo announced a multi-step plan regarding its Alibaba Group holdings. Yahoo said the first step is the repurchase by Alibaba of up to one-half of Yahoo’s stake, or approximately 20% of Alibaba’s fully-diluted shares. The agreement also established a framework for Yahoo to monetize its remaining interest in Alibaba in stages.
On September 18, Yahoo announced the first stage of the Alibaba transaction closed. At closing, Yahoo received approximately $7.6 billion: $6.3 billion in cash and $800 million in preferred shares of Alibaba in exchange for half of Yahoo’s 40% stake. The company also received a payment of $550 million for a technology and intellectual property license agreement. Net cash proceeds after taxes and fees from the first stage of the repurchase agreement totaled approximately $4.3 billion. Yahoo said it will return approximately $3.65 billion in after-tax proceeds to shareholders, or 85% of the net cash proceeds from the initial sale of its shares in Alibaba.
After accretion from the Alibaba share repurchase, Yahoo continues to own approximately 23% of Alibaba Group common stock, valued at $8.1 billion based on this most recent round of funding. Together with its preferred stock, the implied valuation of Yahoo!’s entire remaining stake is approximately $8.9 billion. Using a 32% tax rate as seen in the transaction for stage 1, the stake is worth $6.1 billion. That’s in addition to the $4.3 billion just received. Yahoo’s cash balance was $9.4 billion at the end of Q3.
Yahoo Japan (YAHOY) has a market cap of approximately $21 billion. Yahoo owns 35% of Yahoo Japan or about $7.8 billion. Using the same tax rate used in the Alibaba transactions suggests the Yahoo Japan stake is worth $5.0 billion.
The final piece is the value of the core Yahoo operations. In 2011, core Yahoo reported an EBITDA of $1.47 billion. The trailing twelve month EBITDA for the core Yahoo operations is $1.32 billion. Using a reasonable EV/EBITDA multiple of 6 for the operations suggests a value of about $7.9 billion.
With the cash for the initial Alibaba transaction already received but taxes of $2.5 billion still to be paid, the four parts add up to a total value of about $26 billion for the company or about $22.20 a share for upside of about 30%. The company has 1.17 billion shares outstanding.
The value sitting in Yahoo’s shares has also been seen in the private market. In 2008, Microsoft (NASDAQ:MSFT) made an offer for the shares at $31 (and later $32-33) per share. That valued the equity at $44.6 billion versus a current market cap for Yahoo of about $19 billion.
The valuation upside comes with catalysts and strong institutional support in place. Upcoming catalysts include the expected Alibaba IPO, a decision on how to return the capital to shareholders from the Alibaba transaction, a decision on Yahoo Japan, and continued share repurchases.
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