Yahoo Weighs Bids From Verizon, TPG, YP as First Round Ends

  • Struggling Web portal set Monday deadline for initial offers
  • Earnings report Tuesday set to show further revenue declines

Who Is YP and Why Are They Bidding on Yahoo?

Verizon Communications Inc. will vie with at least one other company and a private equity firm in the bidding for Yahoo! Inc., according to people familiar with the matter.

The Internet portal received offers from suitors including telecommunications provider Verizon, private equity firm TPG and YP Holdings LLC, the digital-advertising business of what was formerly called, said the people, who asked not to be identified because the process is private. Yahoo had set Monday as the deadline for initial bids as it winnows down which companies are in the running to acquire its Web operations.

For Verizon, Yahoo represents a strategic investment. The company would probably combine the online businesses with AOL, which Verizon acquired last year. Private equity buyers often seek ways to cut costs and improve operations at targets before selling them off or combining them with other assets down the road.

Yahoo -- the main on-ramp for millions of people exploring the Internet for the first time in the 1990s -- has failed to keep up with audience and advertising changes that have led to the rise of Facebook Inc., Twitter Inc. and Google. The company’s decision to consider offers for its core business follows years of failed turnaround attempts by Chief Executive Officer Marissa Mayer, who took over in 2012. In recent months, strategy shifts have brought increased investor criticism, including a move by activist Starboard Value LP to replace the entire Yahoo board.

Rebecca Neufeld, a spokeswoman for Yahoo, declined to comment, as did Bob Varettoni, a spokesman for Verizon. Representatives of TPG and YP declined to comment.

Yahoo had extended the deadline for first-round bids by a week, a person with knowledge of the matter said earlier this month. Yahoo shares were down 0.8 percent to $36.22 at 12:20 p.m. in New York.

Earlier this month, people familiar with the matter said potential suitors AT&T Inc. and Comcast Corp. had decided against bidding. Microsoft Corp., which failed with a hostile bid for Yahoo in 2008, won’t bid this time, another person has said.

The Sunnyvale, California-based company is projected to post lower first-quarter revenue and profit when it reports earnings Tuesday after U.S. markets close. Yahoo’s last earnings release, in February, disappointed investors, with the company saying it would cut staff and shutter some businesses. The stock has declined 18 percent in the past year.

Change in Plans

Yahoo said it would explore strategic alternatives, including selling its main Internet operations, earlier this year after scrapping a longtime plan to spin off its valuable Asian assets because of the potential tax implications for shareholders. Last month, Chief Financial Officer Ken Goldman said the board committee working on a possible sale of the core operations is “more active than anyone can possibly believe.”

Still, Starboard Value, a longtime Yahoo critic, in March said it was fed up with the Web portal’s leadership and called for the board to be replaced. The activist fund, which recently increased its Yahoo holdings to 1.7 percent, said the board has failed to deliver results and can’t be trusted to weigh the options that will best serve investors.

Starboard said it was seeking to be involved to ensure a “full and fair sale process,” according to a letter from CEO Jeff Smith. Smith has put his own name up as a nominee to the board.

In an interview with David Faber of CNBC at the 13D Monitor Active-Passive Investor Summit Tuesday, Smith said Starboard is having conversations with Yahoo about replacing some members of the board instead of the entire board.

"We want to settle," Smith said. "If we can reach a mutually agreeable situation, we want to do that. In order to do that we have to get enough representation on the board where we feel comfortable that we would be able to work with the board members in good faith to provide the same capability and credibility in the boardroom for the benefit again of shareholders and for buyers."

Verizon’s Interest

Verizon and its subsidiary AOL had been working with at least three financial advisers on the Yahoo bid, people with knowledge of the matter said earlier this month. Hiring so many banks was a sign that Verizon is serious about its takeover plans -- it has said since late last year that it was interested in buying some or all of Yahoo.

Verizon is looking to make its go90 streaming video service a source of new sales and profit, and Yahoo -- with more than 1 billion people using its e-mail, finance, sports and video sites -- represents a prized asset to combine with AOL’s 2 million users and Verizon’s more than 112 million wireless subscribers. That kind of Web traffic, along with exclusive content, would help Verizon secure a foothold in video advertising against Google’s YouTube and Facebook to serve a mobile phone-addicted generation.

YP, one of the biggest U.S. digital advertising companies, is working with Goldman Sachs Group Inc. to investigate a variety of strategic alternatives, which could include acquiring smaller firms or selling itself, said the people, who asked not to be identified because the negotiations are private.

The company, controlled by Cerberus Capital Management, is valued at $1 billion to $1.5 billion, one of the people said. Its size makes it a candidate for a Reverse Morris Trust with Yahoo: a tax-free transaction in which YP would merge with a spun-off subsidiary of Yahoo’s core business, the person said. Time Inc. also considered such a transaction with Yahoo, Bloomberg reported in February.

Cerberus bought a majority stake in Yellow Pages from AT&T Inc. in 2012, for $950 million. Cerberus holds 53 percent of YP, while AT&T owns the remaining 47 percent. If YP proceeds to acquire Yahoo, AT&T could end up buying part of the Web company that way, one of the people familiar with the matter said.

YP takes in more than $1 billion in annual revenue and last year had adjusted annual earnings before interest, taxes, depreciation and amortization of $166 million, according to a document obtained by Bloomberg. YP’s 3,300-person sales team is the largest local advertising sales force in the U.S., according to the document.

Yahoo management and shareholders could be swayed by YP’s offer if they feel a cash bid from a larger company such as Verizon doesn’t fully maximize potential value, one of the people said. A Reverse Morris Trust would give Yahoo shareholders a partial stake in the combined company, with the ability to capture future earnings growth.

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