The shares of Yahoo (YHOO) are falling after SunTrust downgraded the stock, warning that investors could "sell on the news" after Yahoo's core business is sold.
SELL ON THE NEWS: There are several reasons why investors could sell on the news of a sale of Yahoo's core business, according to SunTrust's Robert Peck, who downgraded the stock to Neutral from Buy. Given a recent report by Re/Code that the acquirer of the core business could have to pay Mozilla $375M annually through 2019, the price of the deal "could be pressured" and the transaction "may carry many contingencies," Peck stated. These contingencies, which would relate to "large contracts that Yahoo has with a number of key partners," could be unacceptable to Yahoo's board, the analyst stated. Despite his reservations about the transaction, Peck still expects the deal to generate about $6B for Yahoo. Following the sale of its core business, Yahoo will probably look to sell its Yahoo! Japan shares, Peck wrote. Japan's Softbank (SFTBF) would seem to be the natural buyer of these shares, but given its recent efforts to reduce its debt, the Japanese telecom company may not be interested in such a deal, the analyst warned. Consequently, Yahoo will more likely either distribute the shares to its shareholders, sell them on the open market in Japan, or sell them "in a coordinated manner" in Japan, according to Peck. In all of these cases, the transaction may be taxable, he stated. On a positive note, Peck says that unloading the Yahoo! Japan shares would pave the way for Yahoo to unlock the "substantially higher" value of its Alibaba (BABA) shares by selling them to Alibaba itself. But, noting that Softbank recently sold its shares in Alibaba back to that company at a 10% discount, Peck says that Yahoo would probably have to accept a similar discount. Among the reasons for that conclusion are that Yahoo holds 14 times more shares than Softbank did, and the fact that any entity which acquires the shares in Alibaba from Yahoo will still only have a minority stake in the Chinese e-commerce giant, Peck wrote. The analyst, who trimmed his price target on Yahoo's stock to $42 from $44, thinks that Yahoo's shares will trade at a discount to their net asset value after its core business is sold.
ANOTHER DOWNGRADE: Also downgrading Yahoo today was Pivotal Research, which cut its rating to Hold from Buy. The firm cited valuation as the main reason for the downgrade, as it noted that the stock was trading close to its $41 price target. Pivotal values Yahoo's core business at just $3.5B, as it notes that the company's share of global business ad revenue is just 3% and falling, and it expects bids for the business to be "conservative." . The firm noted that its price target "incorporates current trading levels for Alibaba and Yahoo! Japan less 25% discounts for illiquidity and uncertainty." It kept a $41 price target on Yahoo.
PRICE ACTION: In late morning trading, Yahoo slipped fractionally to $37.67 per share.
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