With Alibaba SpinOff In Tailspin, What Are The Possibilities For Yahoo?

Yahoo! (NASDAQ:YHOO) owns a total of 384 million ADRs of Alibaba, which comprises 15.4% of Alibaba and is worth nearly $24.43 billion based on Monday’s closing share price for the Chinese e-commerce company. With the Alibaba ADR listing in Q3 last year, these shares became subject to a one-year lock-up agreement that runs until September 21, 2015. If these shares were to be sold or transferred through ordinary means, the proceeds will be subject to a tax of approximately 35%. This will translate into a tax liability of approximately $8.5 billion or roughly $8 per share of Yahoo. Earlier in the year, the Yahoo board authorized a plan to pursue a tax-free spin-off of 100% of the company’s remaining holdings in Alibaba. To effect the split, Yahoo formed Aabaco Holdings, Inc. into which to place both the 384 million ADRs and its 100% interest in Aabaco Small Business , LLC operating Yahoo Small Business.  Subsequently, Yahoo submitted a request to the IRS for a Private Letter Ruling (PLR) on whether Aabaco Small Business will satisfy the “active trade or business” requirement (the “ABT Requirement”) to qualify as a tax-free status. The IRS declined to provide the PLR, though it indicated that it had not concluded the transaction would be taxable.  All matters stand as before and progress towards the transaction continues.  ((Yahoo 8-K filling)) That said, uncertainly remains regarding the transaction’s tax status and a tax-free status remains a condition for the ultimate completion of the  deal.

Given the uncertainly and complexity of the situation, there is another interesting scenario that could benefit Yahoo’s shareholders — Alibaba opts for a downstream merger of Yahoo, or a third player like Microsoft or Google steps in to buy the company. Let’s explore these scenarios.

See our complete analysis of Yahoo! here

Acquisition of Yahoo By Alibaba Or Another Interested Party

In the scenario that Yahoo fails to spin off its Alibaba stake in Ababco, it is possible for Alibaba to acquire Yahoo through downstream merger, which is the acquisition of the parent company by a subsidiary or an associate company. This could result in some tax savings for Yahoo’s shareholders. However, the extent of tax savings has to be determined. Additionally, the shareholders could get a 15-20% premium on the current stock price based on the past trend where listed companies have been acquired. This would be an added benefit for Yahoo’s shareholders. However, majority shareholders like Softbank as well as both companies would have to come to an agreement to make this deal possible.

The other possibility is that an interested entity such as Microsoft could step in to buy Yahoo. But this would mean transferring the tax liability from one set of shareholders to another, unless the acquiring company sees some benefit in acquiring Yahoo’s properties.

At the end of the day, if a spin-off does occur, the shareholders will benefit not only from possible tax savings but also more transparency surrounding Yahoo’s core business. Yahoo is expected to announce its decision regarding the possibility of a spinoff over the coming months.

We currently have a $43.99 price estimate for Yahoo, which is 40% above the current market price.

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