In the highly unlikely event Yahoo’s Alibaba stake was fully taxable, we estimate Yahoo’s sum-of-the-parts value at $46 a share.
While Yahoo’s core business remains challenged, we see a significant margin of safety in shares. Marked-to-market, Yahoo’s Alibaba and Yahoo! Japan stake is worth a combined $42.50 per share, implying investors are getting $6.00 per share in cash and the U.S. business for free. We expect the announced spin of Yahoo’s Alibaba stake to be a catalyst.
May 20, 2015 1:14 p.m. ET
Yahoo! ( YHOO : Nasdaq)
By Gabelli & Co. ($40.98, May 20, 2015)
On Tuesday, the Internal Revenue Service Office of the Associate Chief Counsel (Corporate) announced that it may hold in abeyance any new private letter ruling requests involving some section 355 tax-free spinoff active trade or business requirement questions while it studies how much active trade or business is enough.
A change in how active trade or business (ATB) is treated could directly impact Yahoo’s (ticker: YHOO) ability to spin its Alibaba Group Holdings ( BABA ) stake. While we do not think Yahoo will ultimately pay corporate level taxes on Alibaba, we do believe this could delay the planned spin of Alibaba beyond the fourth quarter.
Yahoo is in the process of spinning its $34 billion, or $35.66 per share, stake in Alibaba. The spun company would have likely included an ATB that was relatively small in comparison to Alibaba (less than 5% of value). Were the IRS to impose some size requirements, the expected Alibaba spin could be treated as a taxable transaction thus rendering the proposed spin impractical.
We highlight that a review could only apply to new private letter ruling requests (presumably Yahoo has already submitted one), or could leave the status quo. Were the IRS to change its view towards ATB size, we expect Yahoo would have a number of options to realize the pretax value of Alibaba.
Most notably, Alibaba could acquire Yahoo in its entirety. We believe such a transaction would provide two key benefits to Alibaba. First, it would remove Yahoo as a 17% owner of Alibaba. Second, it would give Alibaba a 35% stake in Yahoo! Japan. Yahoo! Japan could have strategic value for Alibaba as: 1) as a platform to expand into the Japanese market; and 2) as a bargaining chip for future negotiations with SoftBank ( SFTBY ).