SunTrust's Bob Peck Breaks Down 3 Scenario's For Yahoo's Round 2 Bids

Ahead of the second round of bids for Yahoo! Inc.’ YHOO core, Robert S. Peck of SunTrust Robinson Humphrey reviewed the various bid scenarios.

Peck maintained a Buy rating on the company, with a price target of $44.

The analyst broke up the potential bids into three scenarios, based on the bid price of $2-$4 billion, $4-$6 billion and $6-$8 billion, as well as the remaining five bidders.

Scenario 1

“The WSJ reported recently that PE firms were looking to bid for the core in the $2-3B range. This was much lower than the anticipated $4-8B range,” Peck mentioned.

According to the SunTrust report, it would be viable for a PE firm to bid $2-$4 billion if one assumed EBITDA of $700 million, debt to EBITDA of 3x, 70 percent debt to capital ratio, cost cutting involving 2,000 employees and a 3x target ROE.

Scenario 2

“Leveraging the above math to justify the lower level of the range, we think there are two other assets one could add to Scenario 1 that would either be excluded from "the core" sale or would be additive to the price,” Peck said.

This would include NPV of the Yahoo! Japan royalty for $1 billion and PP&E of $750 million. This could support a bid of $4-$6 billion.

The analyst believes that this scenario would be more viable for a hybrid PE or a strategic bidder.

Scenario 3

The higher range bidding is likely to be viable only for strategic bidders, with the potential bidders justifying a bid of $6-$8 billion by adding the mid-range values in Scenario 2 to IP value of over $1 billion and “larger potential layoffs due from higher cost overlaps.”