Primecap Management Company (Trades, Portfolio) was founded in September 1983 in Pasadena, California. It manages Vanguard Primecap Fund, Vanguard Capital Opportunity Fund, and Vanguard Primecap Core Fund.. Primecap was founded by Chairman and Chief Investment Officer Howard B. Schow, Vice Chairman Mitchell J. Milias, and President Theo A. Kololotrones.
Primecap team evaluates securities based on their outlook over a three to five year time horizon, with the intention of holding them considerably longer if their fundamentals warrant it. They believe successful investment decisions rests in correctly appraising the relationship between the fundamental value of a company and the market price of its stock. A company may be valuable because of its free cash flow, its assets, or both; however, a company will be a superior investment only if it is purchased at the right price. Primecap only invests in their highest conviction ideas.
Last quarter, Primecap increased its stake in Yahoo! (YHOO, Financial) by buying 1,503,200 shares. As of March 31, 2015, the firm was holding 2,310,000 shares of the company. The following chart shows Primecap's holding history in the company.
Yahoo!'s stock appears grossly undervalued. The company's stake in Alibaba is worth ~$40 billion and Yahoo! Japan is worth ~$7 billion. Yet Yahoo!'s market capitalization is just $42 billion. The recent plan of management to spin off its Alibaba holdings into a separate company β Spin Co β by the end of 2015 will remove some of this discrepancy. This structure will improve valuation transparency for both Spin Co and Yahoo!.
The company's core business continues to improve but main focus of investors remains on the monetization of Yahoo!'s stake in AliBaba (BABA) and Yahoo Japan. Yahoo indicated that it intends to "look for sensible ways to realize the value" of its patent and intellectual property portfolio.
According to Morgan Stanley (MS) analyst Brian Nowak, "the core turnaround continues, but YHOO remains focused on monetizing its assets, as it announced it has retained advisors to "determine the most promising opportunities to maximize value" around its 35.5% Yahoo! Japan (YJ) stake.β
Post spinoff, one company will be the currently existing Yahoo! entity which will include the Yahoo! Operating business and its 35.5% equity ownership in Yahoo! Japan joint venture. The second company β Spin Co β will be the newly formed entity which will be a registered investment company and will include Yahoo's 15.4% ownership of Alibaba shares. Spin Co will also include a legacy ancillary active trading business of Yahoo! with ~$50 million in adjusted EBITDA.
The stock in the new company will be distributed pro rata to Yahoo! shareholders. It will be led by an independent and newly appointed management team and board of directors. The composition of Spin Co's board of directors and management team and other details of transaction including the distribution ratio will be announced prior to the close of the transaction. Spin Co will assume no debt as part of transaction, and this distribution will be tax free.
The spinoff of Alibaba stake is almost finalized, and it will improve the valuation transparency of the company's core business and its holding in other companies. Hence, I am bullish on the company.
