After last week's Delivering Alpha conference, in which Dan Loeb of Third Point hinted that something could be done relatively soon, there is more conviction now than ever that something gets done soon.
He also hinted strongly that Jack Ma of Alibaba could be involved in taking over the company. Yahoo! currently owns a 39% stake in Alibaba. Loeb pointed out why he believes Yahoo! is worth anywhere between $19 and $31 per share. The midpoint of that range, $25, is far higher from Stifel Nicolaus' price target. Considering how well shares of Yahoo! have held up in the recent market volatility, especially today, a deal could be done relatively soon. When Loeb's letter first appeared, it was the first step in getting the company to sell itself.
We may also see a higher offer than anyone expects, considering how valuable the Alibaba stake is becoming. This morning, private-equity firms Silver Lake, DST Global, and Yunfeng Capital offered $1.6 billion for a 5% stake in Jack Ma's company. That values the company at $32 billion. That means Yahoo!'s 39% stake in the company is worth around $12.5 billion. Right now Yahoo!'s entire market cap is $17.66 billion, which means the rest of the company is worth just over $5 billion. That includes the core business, the cash on the books, and the other Asian assets, such as Yahoo! Japan.
The Sunnyvale, Calif.-based company has 12 No. 1 Web properties, including Yahoo! News, Yahoo! Finance, and Yahoo! Sports. It is the No. 2 Web brand by total minutes at 17.2 billion per month, but considering the atrocious management and horrendous corporate governance, no one has been able to unlock the value in the company. At the conference, Loeb went so far as to say as, "No one wants to work with these clowns on the board."
Loeb values the company at around $27 to $28 per share, with Yahoo! Japan and the Alibaba Group stake being worth $3.10 and $5.24 per share, respectively. With $2.49 per share in cash, he values core Yahoo! at $2.78 per share.
We have seen an increase in chatter recently on Yahoo! and a potential deal getting done. Stifel Nicolaus' upgrade of the shares because of the buyout rumor is just another feather in the cap toward the potential that a deal could get done relatively soon. The price action speaks volumes.
It looks like something is going to happen relatively soon at Yahoo! Just flip the light switch.
Traders who believe that Yahoo! gets bought out might want to consider the following trades:
Consider going long the common equity here. At less than $14 per share, Yahoo! could see anywhere between a 60% and 100% premium based on Loeb's calculations.
Traders may also want to consider long dated options on Yahoo!, which will appreciate on a takeout offer.
Traders who believe that Yahoo! does not get sold may consider alternative positions:
Yahoo! still has the same board, led by Chairman Roy Bostock, whom Loeb hates. The board bungled the first takeout offer by Microsoft (NAS: MSFT) . Has anything really changed at Yahoo! that much? If you believe it has not, Yahoo! could drop sharply.
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