U.S. Markets closed

Yahoo rallies as firm reveals plan to spin off remaining Alibaba stake

Aaron Pressman

Yahoo (YHOO) had one mission in its fourth-quarter earnings report and the actual earnings didn't have much to do with it. Instead, investors wanted to see the company's plan for a tax-free spin-off of Alibaba (BABA) shares -- and they got it.

Yahoo shares jumped over 7% to $51.49 in after-hours trading.

In a transaction that will create an additional publicly-traded company, Yahoo said it would transfer its remaining 15% stake in Alibaba, 384 million shares, plus what it called "legacy, ancillary businesses" into a new unit dubbed "SpinCo" in the press release. Shares of the new unit will be distributed to current Yahoo shareholders.

"We believe it maximizes value for our shareholders and optimizes transaction efficiency and certainty," CEO Marissa Mayer told analysts. "This is a structure that we can pursue and affect independently, capturing value exclusively for our shareholders."

The spin-off move could save $16 billion in taxes on the $40 billion stake.

As far as quarterly results, the company, which is the parent of Yahoo Finance, said revenue, excluding traffic acquisition costs, for the quarter totaled $1.18 billion, trailing estimates of $1.19 billion. Adjusted earnings per share came in at 30 cents, just ahead of Wall Street’s expectations of 29 cents.

But investors were far more concerned with the tax-free spin-off plan CEO Mayer and staff had come up with to sell more shares of Alibaba without triggering the massive capital gains tax bill the company had to pay the previous two times it sold down its stake in the Chinese e-commerce giant.

Outside investors had been pressing for a more tax-efficient means of monetizing the Alibaba stake, originally obtained in 2005 for $1 billion, via a spin-off. Hedge fund Starboard Value last year suggested just such a plan, along with other measures, to boost Yahoo's stock price.

Yahoo itself will retain all of its operating businesses plus a 35.5% stake in Yahoo Japan. Yahoo will retain its cash holdings and the spun-off unit will not take on any new debt as part of the transaction, Yahoo said.

The transaction is expected to be completed in the fourth quarter of 2015, after a lock-up agreement restricting a sale of the shares expires, Yahoo said. The deal is subject to final approval by Yahoo's board, IRS rulings and other "customary conditions," the company said.

In the fourth quarter, Yahoo's overall revenue minus traffic costs was down 2% from the prior year. Mobile revenue totaled $254 million, up from $207 million the previous quarter. For the year, mobile revenue hit $768 million.

Yahoo should benefit from its new deal as the default search engine in the Mozilla browser throughout 2015, but company executives said it was too early to estimate the impact. Yahoo is still looking to its search  business for additional deals to bolster revenue.

Yahoo is discussing revamping its search deal with Microsoft (MSFT), which is about to reach the halfway point of its 10-year contract, Mayer said. "At this point, we are actively exploring with Microsoft how we might move forward," she told analysts.

The company will also explore snagging the lucrative Apple (AAPL) Safari search default position away from Google (GOOGL), as that contract is expected to expire this year, Mayer said. "We're in the search distribution business and anyone who is in that business needs to be interested in the Safari deal," she said. "It's something that we would really like to provide."

Investors would surely agree.