A hotly debated topic among tech dealmakers has been how much Yahoo Inc.'s (YHOO ) assets are worth.
The new holding company for Yahoo will have its work cut for it after the company sells its search and other assets for an estimated $4.5 billion to Verizon Communications Inc. (VZ). If that deal is completed this month, Yahoo will shed its name and the holding company will be called Altaba Inc.
How do you pronounce that new name? Al-ta-ba or Al-taba? That's a mouthful.
No matter how you pronounce it, Altaba will operate as an investment company under the Investment Company Act of 1940. The question every investor should ask themselves is this. Will the old Yahoo - under a new name - be good at managing the assets?
As of March 31, the companyreported
an investment in Alibaba Group Holding (BABA
) of $41.3 billion and an ownership interest in Yahoo Japan of $9.3 billion. Yahoobeneficially
owns 15.4 percent of Alibaba, representing 383.5 billion ordinary shares. Alibaba has a market cap as of June 1 of $310.99 billion, which would mean that Yahoo's current stake in Alibaba is roughly $47.89 billion. Yahoo Japan has a market cap of roughly $25.4 billion. Yahoo owns a 35.5 percent stake in Yahoo Japan, representing a current market value of around $9.02 billion.
It seems like a no brainer right? Yahoo's current market cap - before the Verizon deal - is $48.10 billion, and its stake in Alibaba and Yahoo Japan is worth $56.91 billion. So Yahoo currently trades for less than the market value of Alibaba and Yahoo Japan. Then throw in that Yahoo shows cash and short-term marketable securities of $6.91 billion, then add the sale from Verizon of roughly $4.5 billion, it bring Yahoo's cash value to $11.41 billion. That takes the valuation for Yahoo up to $68.32 billion.
As of March 31, the company reported deferred tax liabilities for its Alibaba investment of $16.7 billion; this represents nearly 40 percent of the value of Yahoo's stake in Alibaba of $41.3 billion. As of December 31, Yahoo reported deferred tax liabilities of $13.6 billion, while its investment stake was $33.6 billion, representing 40 percent of the value of the stake. With a $48.10 billion valuation on its Alibaba stake, its tax deferred liability, using the same 40 percent, would be $19.46 billion. The company lists other long-term tax liabilities at $519.95 million. Also, the company recently announced a stock buy-back program of $3 billion.
So based on these liabilities, how much is Yahoo worth then? It may be less than the current valuation the market is assigning to it.
There's a big "IF" in all of this. First, can Yahoo figure out how to avoid the tax bill from its Alibaba stake? If not, and Altbaba has to pay that bill at some point, then you can subtract $20 billion from the value of its investment stake in Alibaba. That would be a big hit. Second, an investor in Altaba is hoping that this new investment company can avoid past mistakes made by Yahoo's management.
So this means investors in the new Altaba will be betting on management's ability to navigate the company through a quagmire of financial issues and create value.
That's a big IF at Altaba.
Michael Kramer and the clients of Mott Capital Management LLC own shares of VZ.
Michael Kramer is the Founder and Portfolio Manager of Mott Capital Management LLC, a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.