PE Firms Put Yahoo In Play Again But Sale is Doubtful

Yahoo, the nation’s second biggest search engine, is again the subject of takeover rumors, but this time it’s PE shops that are interested.

On Wednesday, the WSJ reported that AOL and several buyout firms are considering making a play for Yahoo, which currently has a market cap of roughly $22 billion. Silver Lake Partners and the Blackstone Group are among the buyout shops interested in teaming up with AOL to buy Yahoo. But the discussions, the story said, are preliminary and don’t involve Yahoo yet. Yahoo, meanwhile, has hired Goldman Sachs to field any offers. Yahoo shares closed at $15.25 Wednesday.

This all seem a little too preliminary for my taste, especially since no one has apparently involved Yahoo yet. In fact, Yahoo first heard about the discussion from the press—which is oh so reliable—and from its own bankers at Goldman, Dealbook points out. Blackstone has already passed on the idea, Reuters says.

And does anyone remember Microsoft’s failed attempt to buy Yahoo two years ago? Microsoft made an offer of $47.5 billion, or $33 a share, for Yahoo in 2008 and was rejected by Jerry Yang, the company’s co-founder and then CEO. Yahoo, at the time, said the deal undervalued the company. Yahoo tried to get a higher offer but Microsoft walked away.

One of the scenarios posited by the WSJ would be a complex deal where China’s Alibaba’s Group would buy back the 40% stake owned by Yahoo. Some of Yahoo’s other assets would be sold off and resulting company would be small enough that PE firms could finance a bid. Another scenario involves Yahoo selling the Alibaba stake and then combining its operations with AOL in a reverse merger.

No report, that I can see, has named a per share takeout price for Yahoo. But Yahoo’s enterprise value, after removing its stake in Alibaba and Yahoo Japan, is about $13.3 billion, compared to AOL’s $2.9 billion valuation, according to Bloomberg, which cited David Joyce, an analyst with Miller Tabak & Co.

Why the interest in Yahoo? The company has a big brand name that looks as though it could be bought at a discount, one buyout exec told peHUB. PE firms assume that there are hidden assets that can be sold quickly to lower Yahoo’s price further, and they will be left with a core business that could rebound with better management and a better economy, the source says. “Everyone likes a bargain, right? At this point, no one has a strategy for fixing it, so that’s not the premise,” the PE source says.

However, the PE exec is doubtful a deal will result. Yahoo’s board will look like idiots for rejecting Microsoft’s offer that was twice the current value of the company. Second, Yahoo isn’t levered, the PE exec says, “so what pressure are they under to do anything?”

Brian Pitz, a UBS analyst, wrote in a research note today that the co-founders may be amenable to maintaining an independent private company. “But given the significant return potential of Alibaba as well as management’s belief that Yahoo is undervalued, we believe it is unlikely that Yahoo would sell out for less than $22-25/share (representing a 44-64% premium to Wednesday’s $15.25 close),” Pitz wrote in the note.

Pitz said that he has many unanswered questions including the tax implications of asset sales in Asia and possible regulatory risk.