Verizon Divests Media to Sharpen Its Focus

Verizon VZ has inked an agreement to sell its media business, formerly known as Oath, to private equity firm Apollo Global Management for $4.25 billion in cash, $750 million preferred interest, and a 10% equity stake in the new stand-alone media firm, which will take the name Yahoo. The move marks the end of Verizon's direct involvement in the media industry, which it has been steadily unwinding in recent years. We aren't changing our $57 fair value estimate or narrow moat rating, and we view Verizon shares as fairly valued. Verizon spent $3.8 billion to acquire AOL in 2015 and $4.5 billion to purchase Yahoo in 2017 to build a media business that generated $7.7 billion in revenue during 2018, dropping to $7.1 billion last year. The business returned to growth in the fourth quarter last year amid surging demand for digital advertising, and revenue increased 10% year over year during the first quarter. AOL and Yahoo generated about $1.4 billion in combined EBITDA in full years before they were acquired, though we would be surprised if the Verizon media business generated that level of profitability today, given revenue has generally been declining. Given what we know, it doesn't seem Verizon got a great price for the business. However, we like that the sale strengthens the firm's strategic focus on the core telecom business, where its competitive advantages reside. The decision to divest the media business won't have a huge impact on Verizon's financial condition. The sale removes less than 6% of total revenue and likely only around 2% of total EBITDA. In exchange, the firm receives cash equal to about 3% of its net debt load. If Verizon can monetize the preferred interest and residual equity stake, it might shave 2%-3% off of net debt.

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