RemainCo Feels Like a VC Fund to Me
When Verizon Communications, Inc. (NYSE:VZ) announced its $4.8-billion acquisition of Yahoo! Inc. (NASDAQ:YHOO) on July 25, my initial reaction was, “yeah, so what? After the deal closes, YHOO stock will go away and so will everyone’s memory of it, just like what happened to AOL, Inc., coincidentally owned by Verizon.”
After doing a little digging, though, it became obvious that there are some hidden gems that make Yahoo attractive, even before the deal closes next year.
But let’s review the terms of the acquisition first…
Verizon is buying the operating business of Yahoo. That means the Yahoo web site people use as their home page and all of the other aspects of Yahoo’s online presence: Yahoo! Finance, Yahoo! Sports, Yahoo! Entertainment, etc. They also get a bunch of other properties and brand names that may not be as recognizable, including Brightroll, Flurry, and the better-known Tumblr. When the deal closes sometime in the first quarter of 2017, Verizon will end up with these and nearly a billion of Yahoo’s customers (Source: “Verizon to acquire Yahoo!’s operating business,” Verizon Communications Inc., July 25, 2016.)
What Remains at “RemainCo”?
What Verizon is leaving behind is an entity referred to in its press release as “RemainCo,” which is a name that feels like a venture capital fund to me. This is what makes Yahoo stock so interesting right now. The two best-known assets of RemainCo will be Alibaba Group Holding Ltd (NYSE:BABA) and Yahoo! Japan. The value of these two assets alone is more than $33.0 billion. (Source: “Notes to Financial Statements/Note 8 Investments in Equity Interests,” Securities and Exchange Commission, June 30, 2016.)
According to Yahoo’s form 10Q, assets that will end up in RemainCo currently generate approximately $141 million of net income, not including an additional $145 million attributable to Yahoo! Japan. So, right off the bat, you’re looking at a company with current earnings per share (EPS) of about $1.20 annually, given that there are 949.92 million shares of Yahoo stock outstanding. Don’t forget that RemainCo will have an additional $4.8 billion in cash (getting its total kitty up to close to $10.0 billion) to grow its business or acquire others. So, these are the things we know for sure remain at RemainCo.
Is There Buried Treasure In Yahoo Stock?
We get a hint at what we don’t know in the Verizon press release announcing the acquisition. In it, the company points out that Yahoo’s “non-core patents” (included in an entity called Excalibur IP, LLC) are not part of the deal. For me, these are the most intriguing components of what remains at RemainCo.
While these patents may not be “core” to Yahoo’s current business, we have no idea what their real value is to a potential buyer or to RemainCo itself. Since we have no idea what RemainCo’s plans are as a going concern, the patents may end up playing a part in what guides the company’s future direction. There are some 2,650 (maybe even more) patents in the Excalibur portfolio. (Source: Yahoo Assigns 2,648 Patents To Mystery Excalibur IP, LLC Group,” SEO By The Sea, May 2, 2016.)
Heaven only knows the real value of these 2,600 patents. By some accounts, they are worth $1.0 billion. Others have suggested that they could fetch as much as $4.0 billion. (Source: Yahoo Has a Strong Patent Portfolio, But Reported Valuation is Too High, PatentVue, April 13, 2016.)
Chart courtesy of www.StockCharts.com
Regardless of their potential value to a buyer or what RemainCo does with them (monetizes them or sells them outright), those patents have incremental value. When you take this into consideration with the potential future value of Alibaba and Yahoo! Japan, there could still be some meaningful upside to RemainCo. It would be like finding buried treasure.