Barclays: Verizon and Yahoo 'not an inconceivable combination'

A Verizon (NYSE: VZ) acquisition of Yahoo's core Internet business would align with the carrier's broader strategy of leveraging its networks to develop new revenue streams through digital media, analysts at Barclays said.

Verizon CEO Lowell McAdam last week confirmed that the carrier is interested in acquiring at least some of the assets of Yahoo, which continues to search for a potential buyer for its online properties. "We have to understand the trends that we're seeing in some of their results now," McAdam said on CNBC's Mad Money on Friday, "but then at the right price I think that marrying up some of their assets with AOL under Tim Armstrong's leadership would be a good thing."

Underscoring Verizon's interest in Yahoo is a new report from Bloomberg, citing unnamed sources, that said Verizon put Tim Armstrong, CEO of its new AOL unit, in charge of researching a possible bid for Yahoo's assets.

Barclays said a Verizon purchase of Yahoo properties is "not inconceivable," noting the carrier's recent acquisitions including AOL and Millennial Media. Those deals "have all largely focused on building out (Verizon's) tool set in order to create new revenue opportunities that sit on top of the network," Barclay's observed. And they demonstrate Verizon's interest in expanding in digital media in an age of winnowing margins from wireless.

"Management believes that communication services as a percentage of total consumer consumption has remained fairly flat at approximately 6%," the analysts wrote. "Coupled with the situation in which over time it will be increasingly difficult to capture increased dollars for increased access usage has led Verizon to pursue new revenue opportunities that 1) do not necessarily incrementally tap subscriber wallets (think advertising) and 2) can be scaled independently of a network."

Yahoo has reportedly considered selling at least some of its online assets for months, leading to speculation that one of several mobile carriers could pull the trigger on a deal. Yahoo's mobile apps and websites draw 600 users per month, and the company owns the app analytics firm Flurry. Yahoo also claimed 2.9 percent of U.S. mobile ad revenues in 2015, according to estimates from eMarketer.

AT&T and SoftBank, which owns Sprint, are also said to be interested in Yahoo. But AT&T's focus in digital media is firmly fixed on video, and SoftBank may not be interested in making such a move until it can turn Sprint around.

"Based on our further digging into the matter our takeaway is that a potential acquisition of Yahoo seems to fit in line with what Verizon is trying to accomplish strategically," according to Barclays. "This doesn't mean we are endorsing a transaction or its strategy -- we think the company will need to provide better visibility on how all of its new initiatives will contribute to earnings growth. Rather that based on our view of the carrier's longer-term strategy, Verizon's potential interest in an acquisition is not inconceivable."

For more:
- see this Bloomberg article

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