Yahoo Inc. is on the block. Again.
The last time we went through this was in 2011, when several private equity firms kicked the tires pretty hard, but ultimately bounced off. This time the board seems more serious, however, last week announcing the creation of an independent committee to explore strategic alternatives. So let’s lay some odds on the reported suitors, for a takeover of Yahoo’s core Internet assets that sources believe could be worth anywhere from $3.5 billion to $6.5 billion:
Verizon Communications (2:1)
“This is Verizon’s deal to lose,” says a longtime tech banker who believes that Yahoo will ultimately “go to the highest bidder.”
For starters, Verizon (VZ) can afford to be that bidder. It has a market cap of $208 billion, and nearly $5 billion of cash on its balance sheet. Second, CEO Lowell McAdam has been unusually public about his interest in buying Yahoo (YHOO), perhaps in an effort to discourage other bidders. Third, Verizon actually has someone already in place to run the show, in the form of AOL CEO Tim Armstrong. It might be a bit personally complicated for Armstrong to dethrone his old Google colleague Marissa Mayer, but integrating Yahoo’s giant audience and content with AOL could boost Verizon’s competitive position in vital areas like mobile video.
The only hangup here could be pressure from Verizon shareholders, who may not be so sure that buying yet another first-generation web portal is really a step toward the future. Plus there is a big wireless spectrum auction coming up, and those megahertz won’t come cheap. That’s why Verizon will really want to keep the price low, even though it technically could afford to pay up.
Time Inc. (8:1)
At first blush, this doesn’t seem to make much sense. After all, Time Inc., Fortune’s publisher and my employer, has a market cap of just $1.5 billion and only $651 million in cash. But smaller companies can effectively acquire larger ones via something called a Reverse Morris Trust. Here’s how it would basically work:
- Yahoo Inc. would create a subsidiary to hold core Yahoo.
- That subsidiary would then merge with Time Inc. to create a new company. Let’s call it TimeHoo.
- TimeHoo would issue enough shares to Yahoo Inc. shareholders that it would give them both economic and voting control of TimeHoo.
Because of the Reverse Morris Trust rules, neither Yahoo Inc. nor its shareholders would be taxed on this new distribution, so long as Time Inc. (TIME) can convince regulators that this transaction was not part of a longer-term plan that kicked off when the company was spun out of Time Warner (TWX) back in June 2014. This tax strategy could theoretically give Time Inc. some pricing advantage in a competitive auction process.
Mathew Ingram has more on the strategic rationale here, which is a bit reminiscent of the rationale behind Time Warner’s ill-fated merger with AOL in 2000. Basically, Time Inc. would feed its premium content into Yahoo’s massive audience, thus serving higher-priced ads to more people. It’s basically the third leg of a stool that Time Inc. began building earlier this month by purchasing programmatic ad platform Viant. Well, perhaps a lopsided stool, as multiple sources say that Viant was valued at a deep discount to the $300 million pre-money valuation its predecessor entity received from private equity back in 2011.
Time Inc., via a spokesman, declined comment.
Private Equity (10:1)
Around a dozen private equity firms are circling Yahoo right now, and ringing up various outside executives to see if they would have interest in serving as post-acquisition CEO. In fact, multiple sources say that current Yahoo CEO Marissa Mayer also has reached out to private equity firms ― via banker Frank Quattrone ― about possibly fronting an offer of her own.
Back in 2011, interested private equity firms were primarily interested in Yahoo’s Asia assets, which wouldn’t be in play this time around. Silver Lake (working with Microsoft and Andreessen Horowitz) and TPG Capital (working with Greylock Partners) each had a pretty similar plan:
- Sell/spin off the Asia assets.
- Use the proceeds to buy major Web 2.0 properties.
- Cut costs.
Another 2011 offer from Bain Capital and The Blackstone Group (BX) focused mostly on the third part of that, because it was coming in partnership with Alibaba (BABA) and Softbank (which is co-owner of Yahoo Japan).
Even though a 2016 private equity bid wouldn’t include the Asia assets, it also would be designed around a similar thesis. For example, firms could pay six times EBITDA (i.e., $4.5 billion) with plans to cut costs down to three times EBITDA. Basically milk Yahoo for its legacy cash-flows. Most large buyout shops ― with the notable exception of Silver Lake ― have expressed at least mild interest.
To afford such a deal, however, all but one or two interested private equity firms would need to either club up with one another, or secure very large equity co-investments from their limited partners.
This is where I basically give myself some cover, by pointing out that Verizon and Time Inc. aren’t the only strategic buyers that could take a run at Yahoo. Many of the same strategic reasons the deal makes sense for Verizon also apply to AT&T (ATT) and Comcast (CMST). Some of the Time Inc. thinking could also apply to a media company like Germany’s Axel Springer. And then there is the wildcard of Alibaba, which might try to buy core Yahoo as a way to get back the Alibaba stock held by non-core Yahoo. You also can’t rule out SoftBank (ever).
There is, of course, the very real option that Yahoo won’t be acquired by anyone. Again.
Perhaps Verizon’s top shareholders make too much noise. Maybe Time Inc. decides that finding audience isn’t its greatest challenge. Perhaps private equity firms can’t find debt financing in what has become a very tight credit market.
Or maybe bids do come through, but Yahoo’s board thinks shareholders would be better served by remaining independent. There is a case to be made that if Yahoo’s board really wanted to sell, it would have fired Mayer and promoted CFO Ken Goldman on an interim basis. Like all things with the Internet icon, this outcome isn’t obvious.