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Berko: On Yahoo buyout, and buying ETP

By Malcolm Berko

Published: August 6, 2016, 6:00am

Dear Mr. Berko: I own 150 shares of Yahoo, and I also own 200 shares of Verizon, which is buying Yahoo for $4.8 billion. Please tell me what you think of this buyout and what you think will happen to the Alibaba shares, which Verizon isn’t acquiring. And please tell me how much I’m going to get in cash for my Yahoo shares. Also, what do you think about buying Energy Transfer Partners?

— D.K., Davenport, Iowa

Dear D.K.: I recall way back in 1998 when Larry Page and Sergey Brin offered to sell Google to Yahoo for $2 million so they could return to their studies at Stanford. Yahoo’s management said, “Forget about it!” And I recall way back in 2008 when Microsoft offered to pay $45 billion and chump change to buy Yahoo. That was $33 a share. Yahoo co-founder Jerry Yang told Bill Gates to take a long walk off a high alp. Today Verizon is paying a few pennies under $5 a share.

Yahoo (YHOO-$38), as a standalone company that traded at over $110 a share in 1999, just couldn’t cut it. Marissa Mayer was unable to gain the trust of the employees who remained at YHOO when she became CEO. She also lacked the ability and charisma to attract the right bright people needed to run this former juggernaut and generate sufficient advertising revenues. The sale to Verizon (VZ-$54) ends YHOO’s devolution from a once-proud World Wide Web search pioneer to a mewling competitor and gives VZ 1 billion new potential users.

Current Yahoo shareholders will keep the company’s successful investments in Alibaba, China’s e-commerce giant, and Yahoo Japan, which is also profitable. Both Alibaba and Yahoo Japan will be spun off into a publicly traded company that has yet to be given a name. I have several apropos suggestions; however, they wouldn’t be appreciated by management of either company. Some observers think the new company will trade at $30 to $35 a share. The rest of Yahoo, which is worth a bit more than diddly, will be folded into Verizon’s AOL. And you can expect quiet fireworks as employees from both firms become territorial and thousands are laid off. This ends YHOO’s 21-year reign as a public company and completes Marissa’s failed four years as YHOO’s most attractive CEO. All that said, the buyout must be approved by federal regulators, too many of whom, I’ve been told, couldn’t officiate a game of checkers.

I’ve always liked Verizon and often recommended VZ to readers who have asked me to suggest some conservative growth and income stocks. However, I’m concerned that the YHOO merger could be a humongous mistake. I’m worried that Executive Vice President Marni “Blondie” Walden, who runs AOL for VZ, will be at daggers drawn with Marissa and won’t have the cojones to manage the yahoos who come over with YHOO. The two blondes will have to fight it out! I’m also concerned that Walden and her people may become infected by the Yahoo disease, which could affect VZ’s revenue and earnings progress. But if you were thinking of selling VZ, don’t!

Energy Transfer Partners (ETP-$37.50), with a $4.22 dividend (four increases since 2012) yielding over 10 percent, could be a successful speculation for a midstream master limited partnership. ETP, which recently traded in the high $60s, is the third-largest MLP in the U.S. It gathers, processes, transports and stores natural gas liquids and oil and owns 47,000 miles of pipelines. Well-deployed capital expenditures will support ETP’s future revenues, earnings and dividend growth. The oil and gas industry is still a difficult environment, and price changes will continue to reflect uncertainty. Still, Wall Street expects revenues to improve, from $24 billion this year to $27 billion next year, and believes that ETP’s distribution will increase next year to $4.44 a share, up 22 cents from 2016. Value Line believes there is a possibility of a reduced distribution but recommends ETP, suggesting its “capital appreciation potential is worthwhile.” Credit Suisse has an “outperform” rating, with a price objective of $48, and expects management to raise the dividend. Thomson Reuters is also positive on ETP and has an “outperform” rating, too. In addition, Bank of America Merrill Lynch, Morningstar and Market Edge recommend its purchase.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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