The Logic Behind A Yahoo Sale In Summer 2016

Yahoo! Inc. YHOO could be sold by the end of summer or sooner, according to Victor Anthony of Axiom Capital.

"Investors have been bombarded with press reports about the 40+ interested parties for Yahoo's Core business. While the high number (40+) is typical in any asset sale process, we believe the parties who are truly interested in buying Yahoo's Core business likely number in the mid-single digits, with Verizon, PE firms, and now Daily Mail topping that list," Anthony wrote in a note.

The analyst, who has a Hold rating and increased his price target to $36 from $32 to reflect the share price appreciation of Alibaba and Yahoo Japan since his last update, believes it's "likely that Yahoo sells the entire Core as a whole rather than in pieces, with a sale likely netting $5B to $6B, depending on whether the buyer is financial or strategic."

"Selling individual sites like Yahoo News or Finance seems impractical, given that Yahoo Mail is the initial source of traffic for many of these verticals (this would eliminate companies such as Time Inc TIME from the bidding process). The exceptions are Tumblr and Flickr, which could be sold outright," the analyst highlighted.

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Anthony continues to believe "a sale is the eventual outcome" despite Yahoo may talk about the merits of a reverse spin and the strategic plan on the earnings call next week.

"We see a sale occurring by the end of summer or sooner. Complicating matters is the proxy contest, which could drag on until late-July. Most investors we speak with appear to side with the activist investor who has nominated a full replacement of the board. That could force Yahoo's hand to consider a settlement," Anthony continued.

He added, "Given the weak operating performance over the past +3.5 years and the failed Alibaba spinoff, we have to think the board is seeking an end – a sale."

Commenting on the scenario post sale of Yahoo's core business, Anthony noted, "If a sale of the Core occurs, what remains are the stakes in Alibaba Group Holding Ltd BABA and Yahoo Japan, which is likely to trade at a discount to NAV."

"A likely scenario for shareholders is for Alibaba to purchase its shares, probably at an additional discount. The same goes for Softbank with Yahoo Japan," Anthony elaborated.

Meanwhile, the analyst said the core business of Yahoo is "still struggling."

"Our checks have been lukewarm on the Display side but very negative on the Search business. Several search engine marketing firms have pointed to a meaningful loss of market share for Yahoo in 1Q16. Plus," Anthony added.

The analyst cut his first quarter revenue estimate by 2 percent to $844 million (consensus at $848 million) and Adj. EBITDA estimate by 7 percent to $112 million (consensus at $116 million).

"Investors are likely to overlook Yahoo's results and focus on the sale process," Anthony added.

According to TipRanks, Anthony is ranked 150 out of 3,857 analysts. He has a success rate of 56 percent with an average return per recommendation of +9.5 percent.