Yahoo Watchers Wonder: How Much Is The Core Company Really Worth?

That’s the key question swirling through the media investment community today following reports, first from The Wall Street Journal, that Yahoo’s board will discuss a possible sale of the core, mostly media, business in three days of meetings beginning today. Shares are up about 7% so far today on the news.

But the answers may surprise those who have focused more on Yahoo’s splashy content announcements, including its first live stream of an NFL game, instead of the far drearier news about its bottom line. Estimates for the value of the core business range from about $2 billion to $4 billion.

That suggests that — once you take out Yahoo’s stock investments and cash — one of the Internet’s best known pioneers is worth about as much as far less sexy traditional media companies such as the New York Times, DreamWorks Animation, Tribune Media, Starz, and Cinemark.

The Yahoo board’s consideration of a sale adds credibility to the popular view (at least outside of the company’s headquarters) that Mayer’s efforts to turn the former search giant into a digital media ad sales powerhouse have failed.

She spent lavishly to build media properties around brand-name talent including Katie Couric and former New York Times consumer electronics critic David Pogue. She produced long form TV shows including Sin City Saints, Other Space, and Community. And she sought to beef up the company with deals including a $1 billion acquisition of Tumblr and $650 million for BrightRoll.

But Yahoo has little to show for those efforts. The company “remains a ‘really, show me’ story,” RBC Capital Markets’ Mark Mahaney said in October after it reported disappointing Q3 earnings — including a $42 million writedown on the video investments. The share price has declined more than 30% in 2015.

There are multiple explanations for Yahoo’s woes. Mayer’s bet on display ad sales proved to be ill-timed: The value of that business diminished as buyers and sellers increasingly turned to programmatic deals — computer-handled instant auctions that have tended to drive down prices.

She had better luck with video ads, a hot category. Still, Yahoo didn’t have a big enough edge as just about every digital media company rushed to take advantage of the video boom.

“Despite investment in growth areas, net revenue is likely to decline 8% [year over year] in 2015, and we model it flat over the next two years, as advertisers shift budgets away from desktop display,” Nomura’s Anthony DiClemente says.

Through all of this, Yahoo has been helped by its 15% stake in Chinese e-commerce giant Alibaba and 35% holding in Yahoo Japan. After Alibaba went public in the U.S. last year, Mayer hoped to help Yahoo shareholders at the end of this year — when a year-long lock up period expired — by putting the stock into a separate, publicly traded company. Execs hoped that the scheme would enable investors to benefit from the 384 million Alibaba shares without paying taxes on the capital gains.

But the IRS said in September that it would not guarantee that the deal would be tax free. Indeed, the agency and Treasury Department said that month that they might look askance at spinoffs designed to avoid taxes.

Activist investor Jeffrey Smith’s Starboard Value led the charge for Yahoo to scrap the spinoff — and look instead at selling the core company, leaving Yahoo itself with just the Alibaba and Yahoo Japan holdings. The two stock positions accounted for 94% of Yahoo’s $31.2 billion enterprise value, he said in a letter to the company two weeks ago. That suggested Yahoo’s core business was only worth about $2 billion.

“Yahoo is the only Silicon Valley company we know that currently has a stock price almost entirely driven by the value of an entity outside of its control,” Smith wrote.

Others agree that there’s little there there at Yahoo.

Pivotal Research Group’s Brian Wieser values the core operations at $1.9 billion, or $3 out of his $37 stock price target. Cowen and Co’s John Blackledge is a little more upbeat, attributing $3.8 billion to the businesses.

But the values are only meaningful if someone is willing to pay.

Wieser says that a major telco, looking to boost its footprint in mobile services, might be willing to step up the way Verizon did this year with its acquisition of AOL — once considered a potential merger partner for Yahoo. Other potential buyers might come from data marketing, or other Internet media providers. And private equity firms might see an opportunity.

“The saving grace for Yahoo is that it still has a relatively large user base that is reliant on the platform so long as they maintain email addresses there,” the analyst says. “It also has a still-relatively strong (and still-relatively large) sales force.”

Even so, the “big question is whether anyone would actually show up with a meaningful bid.”

Blackledge also says private equity buyers might see a way to squeeze value out of Yahoo. But it’s “unclear” who else might buy and whether “various strategic bidders could be interested in distinct assets vs the entire Core business.”

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