Yahoo, welcome to France!


For the past half-year, Yahoo (YHOO) has been negotiating with France Telecom to buy a controlling interest in Dailymotion, an online-video website that FT acquired in 2011 for €127 million ($165 million).  According to the Wall Street Journalthe two parties reached an agreement last month in which YHOO would pay $225 million for 75% of Dailymotion, the 10th largest You Tube competitor.

This looked like a sweet deal for both sides.  FT would get all its cash back plus a profit and would retain a 25% interest in Dailymotion, while YHOO shouldered all the financial and operational burden of growing Dailymotion as fast as possible.  YHOO would take a big step forward in developing an online video arm.

redressement productif intervenes

Then Paris stepped in.  In a move reminiscent of its rejection of Pepsi’s bid to acquire yogurt-maker Danone, the parties were summoned to the offices of the French Minister of Industry (=redressement productif), Arnaud Montebourg on April 12th.  Le Monde says M. Montebourg yelled at FT, described Dailymotion as a national treasure that must remain in French hands and vetoed the deal.

Odd behavior for an official who is a central figure Paris’s campaign to convince foreigners to invest in French companies (“Say Oui to France, Say Oui to Innovation”).  On the other hand, this is France we’re talking about.

damage done

This government move has bad consequences both for France, and for Dailymotion:

–Dailymotion is now stuck being a part of a telephone utility, which doesn’t have the skills, connections or capital to help it grow.

–Dailymotion employees see that their dreams of making a large profit by cashing out in a sale, or of being key figures in a large internet entity have gone up in smoke.  The most talented are doubtless already cutting their losses and leaving France for tech jobs elsewhere.

–Paris has just shown foreigners that any capital they put into France is subject to the whims of the ruling elite and could easily be trapped there forever.   M. Montebourg’s public post-meeting gloating about his action only reinforces this idea.

–the move is another significant step down the path to economic irrelevance blazed by Japan.

France is not the only chauvinist…

…although it is the birthplace of the Nicholas Chauvin legend.

Every country restricts foreign investment to some degree.  Almost no one lets non-citizens control essential industries like defense, telecommunications or media, for example.  Developing economies, fearing that rich foreigners will spirit away local businesses on the cheap, often enact wider restrictions.  Continental European nations, where preserving the position of a small group of “haves” is a very high priority, do the same.  The US, fearing its growing economic power, won’t let China buy much of anything.


M. Montebourg seems to have no clue that he has highlighted the negative reality behind the “Say Oui to France-innovation” campaign.

The campaign’s website, which I thought was well done, features prominently an explanatory video driven by the same Dailymotion Montebourg has just eviscerated.

The French love to disparage American intellect and culture.  According to one recent description, we have been mentally ensnared by our greatest creation, Disneyland, and are now unable find our way back to the real world.  They don’t seem to get it that venerating yogurt and online videos suggests you’re a lot more confused than we are.   Or that being lost in memories of the glory of the Ancien Régime is not such a hot thing, either.

how much is Yahoo worth?

YHOO’s financials

This is a first pass through the YHOO financials.  Although the company’s statements have the same strong appeal for a puzzle-solver as sudoku or the NY Times crossword puzzle, I don’t think I’m going to do any more.  Why?  This is a situation where a value investor’s experience and instincts are important, not those of a growth investor like me.

But I do know something about China and about Japan–which, along with the erratic behavior of YHOO’s management, seem to me to be the big wild cards here–so I think my comments have some value.

Here goes:

the parts

YHOO consists of four parts:

1.  Working capital on the balance sheet of $2.6 billion.

2.  A 35% equity interest in Yahoo Japan (4689:JP).  That stock closed at ¥24,500 per share overnight, giving YHOO’s holding of about 20 million shares a value of $6.4 billion.  Despite its large interest, YHOO is more or less a passive investor in 4689, which is controlled by the Japanese internet firm Softbank (42% interest).   [I went to Yahoo Finance first to get the stock price information, but the site didn’t have it.  Google Finance did.]

YHOO recorded about $350 million on its income statement as its share of Yahoo Japan’s earnings last year, but actually only received cash of $61 million in dividends.

3.  A 43%  primary (meaning, as things stand now) equity interest in the Alibaba Group, or 40% fully diluted (meaning after any warrants, stock options, convertibles… are exercised).

YHOO acquired its holding in Alibaba, a private mainland Chinese company, in 2005 in return for $1 billion in cash plus YHOO’s China search business.  Alibaba, which also has Softbank as a minority shareholder, runs the Chinese equivalent of eBay and Paypal.

According to YHOO (p. 76 of the 2010 10-K), Alibaba had revenue of $1.3 billion, up 77% year on year, in 2010 and made a slight accounting loss.

YHOO’s balance sheet carrying value–based on its purchase price–is $2.3 billion.  But Alibaba is growing very fast.  Its revenues today are triple what they were two years ago–no mention of revenues in either the 2005 or 2006 YHOO 10-Ks.

Let’s just make up a number for asset value.  If Yahoo Japan is worth 3x carrying value, Alibaba should easily be worth 4x, probably more.  But 4x carrying value = $9.2 billion.

4.  The rest of YHOO.  This is a shrinking business that generated about $1 billion in cash last year.  If you ran this part of YHOO for maximum cash generation until the flow turned negative and then closed it down, it might be worth $5 billion.  Maybe you could sell it for $3 billion today.

the sum

$2.6 billion + $6.4 billion +$9.2 billion + $5 billion   =   $23.2 billion, or about $18.50 per share.  Even though Yahoo Finance didn’t have a quote for Yahoo Japan, it did list a price target for YHOO shares a year from now.  It’s $17.62.

the issues

I think all the numbers are pretty solid except for Alibaba, which is 40% of the total. That’s an issue.

potential plusses

1.  Top management of YHOO hasn’t covered itself in glory over at least the past half-decade.  Still, the Yahoo brand name is a powerful asset.  Maybe the core company would be worth a lot more if put in more competent hands.  Let’s dream.  Add $5 billion to asset value?

2.  Alibaba is in its early growth days.  I may be undervaluing it significantly.  Add another $5 billion to asset value?

So YHOO’s value might be $26.50 a share?

potential minuses

1.  Masayoshi Son of Softbank controls Yahoo Japan, not YHOO.  Mr.Son was a corporate outsider with a somewhat suspect pedigree when he struck his deal with YHOO.  He’s now firmly inside an establishment that protects its own fiercely against the possibility of foreign interference.  Basically, YHOO has no power in this relationship.

Cellphone-based social networking companies have displaced Yahoo Japan much in the same way that Google and Facebook have supplanted YHOO.  Arguably, even at 15x earnings Yahoo Japan’s stock price is inflated by local stock market investors who see it as a defensive holding during a time of economic turmoil.

Who would buy 4689 from YHOO?  Softbank gains nothing by doing so.  A 1% dividend yield isn’t particularly attractive.  Any private buyer would put himself into the same powerless situation YHOO is in now.  A secondary offering would have to come at a significant discount, I think.  Selling a third of the company this way might take years.

2.  Jack Ma controls Alibaba, including a portion of its Alibaba voting rights that YHOO has ceded to him.  After his unsuccessful attempt to buy back YHOO’s holding earlier this year, Mr. Ma has begun to take important profit contributors out of Alibaba, starting with Alipay, the group’s Paypal equivalent–whether other shareholders like it or not.

In this case as well, I don’t see that YHOO has any real power.  Beijing may well be happy to block any potential sale, especially to another foreigner.  Mr. Ma may also have a contractual right to do so (who knows?).  How big a discount to intrinsic value would you require to put yourself into the poor bargaining position YHOO is in?    …probably a very big one.

3.  taxes.  Suppose both the Alibaba and Yahoo Japan stakes could be sold.  Under normal circumstances at least 20% of the sale price would go to some government tax collector–maybe more.  YHOO says it can’t find a tax-efficient way to get sales done.  Taxes could shave $4 a share off a sum-of-the-parts value.

4.  details of the joint venture contracts.  YHOO says it’s taxes.  I think there are no buyers–although not many sellers have gone broke by underestimating the intelligence of private equity/hedge fund purchasers.  But there may also be “change of control” provisions in the agreements with Yahoo Japan and Alibaba that either prohibit sale to a third party or significantly disadvantage any new owner.  It’s possible that YHOO doesn’t want to own up to any foolish terms it may have agreed to.

my conclusion

YHOO is a $14.50 stock as I’m writing this at about 11am Friday.  An $18.50 target gives me a 28% gain.  It’s possible that the stock could go significantly higher, if either of my plusses pan out.

But I’m unwilling to bet that YHOO’s board will turn competent overnight.  I think that YHOO will need to make significant concessions to Mr. Ma in order to be able to realize any value that’s in Alibaba.  And Alibaba’s most of the growth story. I think potential minuses outweigh potential plusses.

So I’m going to pass on this one.  It will be interesting to see how the bombastic Mr. Loeb fares in his crusade for change–although greenmail rather than change may be his real goal.