Youssef Squali Comments: Is Yahoo In A Win-Win-Win Situation?

December 3, 2015, Yahoo Finance

Shares of Yahoo! Inc. (NASDAQ: YHOO) gained more than 5 percent on Wednesday after news reports surfaced the company is exploring a potential sale of its core Internet business. 

Youssef Squali of Cantor Fitzgerald maintained a Buy rating with a $44 price target but a probability-weighted analysis of three scenarios suggested upside to $47 per share. 

Squali’s three scenarios include: 1) a fully-taxed spinoff of Yahoo’s Alibaba Group Holding Ltd (NYSE: BABA), 2) a tax-free spinoff of its Alibaba stake, and 3) a fully taxable sale of the core Internet business. 

News reports surfaced that Yahoo’s Board of Directors are convening to discuss strategic alternatives, including the sale of its core Internet business and how to best maximize value from its $30 billion-plus stake in Alibaba. 

Following the news report, Youssef Squali of Cantor Fitzgerald performed a detailed scenario analysis of the three most likely outcomes: 1) Yahoo sells its Alibaba stake in a fully-taxed transaction, 2) Yahoo manages to exit its Alibaba stake in a completely tax-free manner, and 3) Yahoo sells its core Internet business in a fully taxed transaction. 

Based on the scenarios, the analyst derived a probability-weighted fair value of $47 per Yahoo share – indicating a potential upside of more than 30 percent in the company’s stock. 

"Our analysis of the three most likely sale outcomes yields a probability-weighted fair value for Yahoo shares of ~$47, assuming one of the three events happen to pass between now and early 2016," Squali explained. "Importantly, we believe a re-rating of the stock could be underway, driving the stock higher between now and January, management’s anticipated time-frame for conclusion of the Aabaco spin-off." 

Yahoo sells its Alibaba stake in a fully taxed transaction: In a least tax efficient scenario, Yahoo’s sum-of-the-parts valuation would yield a $37.43 fair value. 

Yahoo sells its Alibaba stake in a tax-free transaction: In a tax-free scenario, Yahoo’s sum-of-the parts valuation would yield a $51.22 fair value. 

Yahoo Sells Its core Internet business in a fully taxed transaction: Squali noted this is the "best option for maximizing shareholder value" with the "added benefit" of reducing the tax uncertainty surrounding an uncertain Alibaba spinoff. In this scenario, a sum-of-the-arts valuation would yield a $53.14 fair value.