Yahoo (YHOO) Getting Cheap Enough For LBO Firms To Pounce

If Yahoo's stock (YHOO) had approached $20 a year ago, private equity firms would have been circling like pack wolves. Now, with debt markets tighter, private equity might have a harder time raising the necessary cash, but it's still worth noting how cheap Yaho's core business is.

What do you get when you buy Yahoo for $21 a share?

1. Cash
2. Stock in G-Market, Alibaba, and Yahoo Japan
3. Yahoo's business.

How much are those things worth?

Cash: approximately $2 billion, or $1.50 a share, at the end of Q1, after netting out debt.

Asian stocks: approximately $13.8 billion, or $10 a share, at the end of Q1, per Yahoo management (some issues to consider here--see below).

Yahoo's business: Implied value of about $15 billion, or $11 a share.

Is $15 billion for all of Yahoo cheap? Consider:

• Facebook just sold stock to Microsoft at about that price. Facebook will generate about $300 million in revenue this year, versus Yahoo's $8 billion.
  
• $15 billion is about 11X trailing EBITDA, a valuation that, until recently, was considered fair for the likes of moribund old media companies like newspapers and Time Warner (these companies are now trading at about 6X EBITDA)
• If Yahoo generates the same amount of cash for the next ten years as it generated last year (about $1.4 billion of free cash flow), you would pay off a $15 billion investment in a little over 10 years.
  

Bottom line, if you think Yahoo can merely avoid deteriorating further over the next decade, let alone grow, $15 billion is not a bad price.

Of course, "break-up value" calculations assume that you could quickly convert those Asian assets into cash, which you probably couldn't. For one thing, blocks of stock that large aren't usually liquid. Second, Asian stock markets have dropped since last quarter. Third, you (Yahoo) would have to pay taxes on the gains, which would likely chop the net by about 30%. So, to be conservative, you might assume that the Asian stocks are worth, say, $7-$10 billion to Yahoo. This would put the value of the core business at a more expensive--but still attractive--$20 billion.

See Also: Yahoo Not Closing Down Yet

Disclosure: Henry Blodget has a long-term position in Yahoo (YHOO)