Cantor Fitzgerald Downgrades AOL, Notes Merger With Verizon A Positive For Yahoo

In a report published Tuesday, Cantor Fitzgerald analyst Youssef Squali downgraded shares of AOL, Inc. AOL to Sell from Buy following Verizon Communications Inc. VZ's $50 per share acquisition offer. According to Squali, Verizon's acquisition offer represents an 8x multiple of his 2015 OIDBA and reflects a "fair" valuation for AOL who is growing in the mid-single digits with an approximate 20 percent OIDBA margins. The analyst also added that it is unlikely a second bidder will emerge with a higher takeout offer. "We think this deal highlights the attractiveness of assets that bring scale and technological capabilities that can be leveraged across larger platforms in the highly dynamic ad industry," Squali wrote. Squali continued that Verizon's interest in launching video mobile content for its wireless customers drove the rationale behind the acquisition. Over the past few quarter, AOL has demonstrated success with programmatic, video and mobile advertising. As such, AOL's technology suite could prove to be "valuable" for Verizon, especially in terms of monetizing its subscriber base. Deal Highlights The Scarcity Value Squali further noted that the Verizon-AOL deal highlights the scarcity of high-quality digital assets and the ad tech stack, given a lack of free standing video ad platform and end-to-end programmatic tech stack. Following the merger announcement, Yahoo! Inc. YHOO will be the last freestanding online display platform of scale. The analyst argued that Yahoo's lack of end-to-end ad tech capability, continued rapid growth in programmatic advertising and a "relatively soft" performance in its core display business will result in management to "feel some pressure" to improve its performance in its core business or explore a potential sales. Squali stated that Yahoo should be more compelled to explore a potential sale, particularly upon the completion of the spin-off its Alibaba Group Holding Ltd BABA stake later this year. Bottom line, Squali concluded the merger is a positive for Yahoo given its "interesting" combinations of assets including Video, Mobile and Social. Moreover, Yahoo's valuation (adjusted for the Asian assets) implies "almost no value" for Yahoo core. Shares of Yahoo were maintained with a Buy rating and unchanged $60 price target.