Is Yahoo! (YHOO) Better Off As Two Companies?
Yahoo!’s (YHOO) international operations are OK, especially if you compare them to the domestic part of the company.
In the last quarter, Yahoo! US grew only 5% to $1.11 billion. International operation grew 15% to $579 million. There is level of currency risk/reward in the overseas businesses. And, the company has at least two very valuable assets. One is its 34% ownership in Yahoo! Japan which was valued at just under $7 billion as of June 30.. Softbank is the other large owner. In the second quarter, revenue at the Japanese company rose 20% to $482 million.
Yahoo! also has a 44% interest in Chinese online company Alibaba. The e-commerce operation plans to go public and raise $1 billion in the current quarter. Yahoo!’s piece of the company is certain worth in the billions of dollars.
It is fair to assume that with Yahoo! trading at 5.3 times sales, an new independent international company would trade closer to 7x to 8x. That is about $18 million. Add in Yahoo!’s ownership in the Chinese and Japanese companies and the market value of Yahoo! International would probably be closer to $25 billion to $30 billion. The entire YHOO market cap is $36 billion now.
This leaves Yahoo! US with a value of $6 billion to $8 billion. That is for the part of the company that has a $4,5 billion run rate. It is only a 2x revenue valuation. Too low? CNET (CNET), a technology information portal trades for 2.8x. ValueClick (VCLK), an online advertising operation trades a 3.7x, which has been pushed up sharply by M&A rumors.
And, Yahoo! US is no longer growing.
This would leave Yahoo! US to cut costs and try to improve its display ad rates through new methods like behavioral targeting. Based on the company’s 10-Q, Yahoo! US had operating costs of $756 million before depreciation and amortization and stock-based costs. Could these costs be cut? If the new company was only operating in the US, it would seem likely.
Not unlike the upcoming plan to split Altria (MO) into two pieces, Yahoo! shareholders would get to have two bets to make and not one. The first company would be the faster growing overseas operation with valuable assets in Japan and China.
The second company would have a much lower growth rate. But, its cost cutting potential and the chance that it can do a better job of getting improved rates for its inventory might give the company a chance to improve a dismal performance. And, that could give the US shares some real upside.
Douglas A. McIntyre