Altaba's appeal as a play on Alibaba Group Holdinghas increased following a series of steps that have simplified its structure and reduced legal risk.
The company (ticker: AABA), the former Yahoo, has in the past six weeks completed its sale of a $6.5 billion stake in Yahoo Japanand used part of a hefty position in Alibaba to execute a $13.8 billion offer that let Altaba holders swap their stock for shares in the e-commerce giant. Altaba has also moved to resolve litigation stemming from the widely publicized Yahoo data breaches several years ago.
Altaba shares closed 92 cents lower Tuesday at $64.98, reflecting an ongoing slide in Alibaba, whose shares fell $2.24 to $156.65. There is nearly 0.5 of a share of Alibaba embedded in each share of Altaba.
At the close of trading on Friday, Altaba traded at a 23% discount to its net asset value, based on a calculation on its web site that the company updates each week. Roughly 98% of Altaba's assets now consist of Alibaba stock and cash.
Bulls argue that the discount is too wide and that Altaba offers a good proxy for Alibaba, whose shares have declined more than 25% from a record $211.70 reached in early June.
'Altaba and its CEO Tom McInerney have been diligently executing on a shareholder value-creation strategy that was put in place when he became CEO last year, and we're getting close to the end of that process,' says Jeff Lignelli, chief executive officer and portfolio manager at Incline Global Management in New York.
Incline holds Altaba stock.
Lignelli argues that Altaba is a cheap way to play what he views as an undervalued Alibaba. The Chinese company's shares now trade for around 30 times projected earnings for the company's fiscal year, which ends in March. He thinks Alibaba stock, depressed lately by concern over profit growth and the selloff in Chinese equities, is heading back over $200.
Revenue growth remains strong at around 60%.
The discount on Altaba shares relative to its NAV'an issue for several years'reflects investor concerns about taxes. Altaba probably would pay a tax rate of about 21% if it were to completely liquidate its remaining 283 million Alibaba shares, worth about $45 billion.
The 23% NAV discount on Altaba is wider than the likely tax rate, reflecting the probability that management would have to make concessions to sell such a large stake. Excluding Altaba's net cash, the recent NAV discount is nearly 27%, a figure fans of the stock say is more meaningful because Altaba wouldn't have to pay taxes to distribute cash.
Lignelli says the discount reflects 'deal fatigue' among investors who have waited years to cash in on Yahoo's assets. Barron's has written favorably about Altaba on several occasions, including an article on June 9.
On Monday, the company announced a new $5.75 billion stock repurchase authorization as it continues a buyback program that began in June 2017, when Yahoo sold its core Internet business to Verizon Communications, changed its name to Altaba and moved to simplify its structure under McInerney, who succeeded former CEO Marissa Mayer.
When McInerney took over, he didn't give a timetable to wind down the company but his goal has been to effectively liquidate Altaba tax-efficiently as quickly as possible. Reflecting this, the company has acted expeditiously to execute its prior buyback authorizations. Altaba now has about $7 billion in net cash to implement the new repurchase program.
Since it began its purchases in June 2017, the company has bought back or retired about $24 billion of stock. By acquiring the shares at a time when Altaba was cheap relative to Alibaba, management has helped the company's stock to outperform a composite of Alibaba and Yahoo Japan by 16 percentage points over that period.
One key to the outlook for Altaba will be how well Alibaba performs. JP Morgan analyst Doug Anmuth resumed coverage of Altaba last month with an Overweight rating and a price target of $88, reflecting a target for Alibaba stock of $215 from Alex Yao, a fellow analyst at the bank.
The other important variable will be what Altaba decides to do with its remaining Alibaba stake. The company probably would like to sell itself to Alibaba for stock, which would be tax-efficient for Altaba holders. The thinking on Wall Street is that Alibaba might be willing to buy Altaba at a 10% to 15% discount to the value of its Alibaba stake in what would amount to an attractive share buyback for Alibaba.
Altaba presumably would accept such a deal because it would be more attractive than liquidating the Alibaba stake and paying a 21% tax rate. However, Alibaba hasn't shown interest so far in such a deal. Alibaba declined to comment.
In a shareholder letter released Monday, McInerney expressed satisfaction with the company's progress since June 2017.
'While we're not quite done, we stand today as a vastly simplified company, with 98% of our assets in one stock or cash and a much shorter list of contingent liabilities,' he said. 'We have a trading history of very high correlation to Alibaba, while materially outperforming it on a total return basis. And yet we continue to trade at a material discount to our after-tax Net Asset Value, which we will continue to actively seek to reduce.'
Asked in a Barron's interview Monday about the prospect of a deal with Alibaba, he said that Altaba 'is open to anything that will drive shareholder value.'
Many investors believe that Altaba's simpler structure will make it more appealing to Alibaba. The performance of Altaba shares will be driven by Alibaba's stock price, but investors can take comfort that management has played its hand well so far and is determined to deliver for them.