Yahoo! Japan Gets Some Love

 | Dec 09, 2013 | 1:54 PM EST
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At one point last night, Yahoo! Japan was up more than 9% in Tokyo trading. It closed up 6%, well ahead of the Nikkei's 2% gain.

The reason for the strong move was that Goldman Sachs upgraded it to its conviction list from a Neutral rating before.

Yahoo! Japan is extremely important to Yahoo! (YHOO), even though it gets forgotten about when people discuss Yahoo!'s investment in Alibaba.

Yahoo! Japan has a market cap as of today of $29.6 billion. Yahoo! owns 35% of it, or $10.4 billion.

Most Wall Street analysts discount that price for taxes Yahoo would have to pay if it ever sold its stake (plus probably a liquidity discount assuming you wouldn't be able to sell it exactly at its current market price). So, most discount it down to something like $7 billion. That means it's worth about 18% of Yahoo!'s current stock price. It's still meaningful.

And now, with this upgrade to Yahoo! Japan, Goldman is saying it's worth a lot more that its current price. Plus, you have many, including me, who believe that the Japanese yen is going a lot lower. If yen trades to 1.20 vs. its current 1.03 levels against the U.S. dollar, Yahoo!'s stake in YJ would be worth $12.1 billion instead of $10.4 billion (pre-tax). If YJ is worth more on a fundamental basis -- let's say 25% higher than current levels -- then Yahoo's stake next year (with a weakened yen) would be worth more than $15 billion instead of the $10 billion currently.

I still continue to believe that Yahoo! and Softbank will figure out a way to do some kind of cash-rich split in the next six months. It's a no-brainer for both. If Yahoo!'s stake is worth $10 billion, do a deal at $9 billion whereby Yahoo! gets 2/3 of that in cash and the rest in other assets, like AOL (AOL), for example. Yahoo! Japan would buy AOL and then hand it over to Yahoo as part of the deal.

Yahoo! gets $6 billion cash and AOL from selling its stake in YJ. And there's no tax bill. That's obviously a lot higher than current Wall Street estimates.

And the deal is good for YJ and Softbank (which is the biggest owner of YJ).  Why? Because they immediately get to retire 35% of the shares of their company post-deal. Guess what happens then? The value of the remaining YJ shares skyrockets, along with their projected EPS.

This is why I'm bullish on Yahoo, AOL, YJ, as well as Softbank in the near term.

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