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Will it or Won't it? Yahoo to Reveal Next Step After February 2

Zacks Equity Research

Investors are intently awaiting Yahoo Inc.’s YHOO next strategic step. Will it sell the core business? Who will buy it? These are just a couple of questions doing the rounds right now.

However, investors have to wait a bit longer. Per Reuters, which cited people familiar with the matter, the company will take a call on the next step after releasing its quarterly earnings on Feb 2.

Reportedly, Yahoo wants to assess investors’ reaction after presenting its strategic vision at the earnings call.

The report also states that Yahoo, this month, has rejected a number of interested buyers for its core Internet assets. The potential buyers included private equity firms, according to Reuters.

Yahoo has, however, refused to comment.  

The Story So Far

Last month, Yahoo scrapped its plan to spin-off the $32 billion stake in Chinese e-Commerce giant, Alibaba, amid investors’ concern about a potentially enormous tax bill.

This gave way to rumors about a possible business sale.

That being said, it cannot be ignored that the board will have an extremely difficult decision to make as it has to sell a core business that isn’t growing and which Yahoo investors aren’t willing to pay anything to hold. It is an open secret that Yahoo banks heavily on the value of its Asian assets despite the huge user base that trails only Alphabet GOOGL and Facebook Inc. FB in size.

The traditional search and display businesses are dwindling. So the only part that looks somewhat promising is the Mavens unit and the only hope of making a sale is pursuing unknown outsiders that it will continue to grow.

Is Verizon a Potential Buyer?

Yahoo’s technology and user base could be attractive to telecom player Verizon Communications Inc. VZ.

At the UBS Global Media and Communications Conference, Verizon CFO Fran Shammo, hinted that the company may acquire Yahoo, if the deal promises adequate value for shareholders.

Naturally, the possibility of a takeover by the U.S. telecom behemoth is still at a nascent stage. However, if the deal materializes, we believe Verizon will significantly benefit from it.

The core businesses of Yahoo perfectly complement Verizon’s focus areas. If the deal takes place, Yahoo’s online ad technology and popular content, apart from the vast user base will be combined with AOL Inc.’s (Verizon bought AOL in Jun 2015) targeted ad technology and consumer data platform. It will be integrated into Verizon’s massive subscriber base and Internet-based mobile video offering to provide a powerful data-driven targeted mobile ad platform.

The report also quoted Shammo stating “you can’t talk about something that’s not up for sale,” when asked whether Verizon is or will be a bidder.

Conclusion

Yahoo investors have a month beginning Feb 25 to nominate a slate of board members, and in the last two letters to the board Starboard has indicated its willingness to launch a proxy contest.

If Yahoo does manage to find a buyer for part or all of its business, this would be an opportunity to finally cash out of the ailing Internet company. Since the Asian assets will fetch a good value, the uncertainty pertains to what a buyer would be willing to pay for a core business that the market has bailed out on.

We would advise investors to hold on to this Zacks Rank #3 (Hold) stock for now. However, as Mark Tinker, head of Framlington Equities Asia at AXA Investment Managers, puts it, “investors should view Yahoo stock as a restructuring proposition, not a growth one.”

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