Citing tax concerns, Yahoo shelves plan to spin off Alibaba stake
Yahoo Inc said on Wednesday it had shelved plans to spin off its stake in Chinese e-commerce giant Alibaba Group Holding Ltd, citing tax concerns, and will instead create a separate company to hold the rest of its assets.business Updated: Dec 10, 2015 12:05 IST
Yahoo Inc said on Wednesday it had shelved plans to spin off its stake in Chinese e-commerce giant Alibaba Group Holding Ltd, citing tax concerns, and will instead create a separate company to hold the rest of its assets.
The new publicly traded company will house Yahoo’s internet business and its 35% stake in Yahoo Japan, giving investors a clearer view of the company’s core business. However, the plan -- which may take a year or more to conclude -- adds another layer of uncertainty to chief executive Marissa Mayer’s efforts to revive the struggling company.
Yahoo had intended to spin off its Alibaba stake, worth more than $30 billion, by January. But investors, lacking assurance from the US Internal Revenue Service, were worried that a spinoff could cost shareholders billions in taxes.
Yahoo, which has a market capitalisation of about $35 billion, owes almost all of its valuation to its 15% stake in Alibaba and its holding in Yahoo Japan. Yahoo executives said on a conference call they still believed the original spinoff would have been tax-free but the spectre of a big tax bill had unnerved investors, depressing the company’s stock price.
The new transaction should eliminate a valuation discount of over $11 billion on Yahoo’s Alibaba stake that is part of the company’s share price, said Murali Sankar, an analyst at brokerage Boenning & Scattergood Inc.
However, shares of Yahoo, which will remain publicly traded, were down 0.6% at $34.62 in morning trading as investors digested the complexity of the so-called “reverse spinoff”.
The new plan will require Yahoo to win the consent of a large cast of players -- including regulators, shareholders, bondholders, business partners and others “too many to name”, chief financial officer Ken Goldman said on the call.
The plan to spin off Alibaba stake would have been far simpler, he added.
Yahoo has struggled to grow its internet business, which includes selling search and display ads on its news, sports sites and email service, in the face of competition from Alphabet Inc’s Google and Facebook Inc.
But Yahoo.com still ranks fifth in terms of daily visits, according to monitoring firm Alexa, and this could make it an attractive target for a telecom carrier or private equity.
“A separation from our Alibaba stake, via the reverse spin, will provide more transparency into the value of Yahoo’s business,” Mayer said in a statement.
Mayer had planned to use the proceeds from the sale of the Alibaba stake to focus on expanding the company’s mobile, video and social media offerings.
“While a sale of a growth-challenged internet business is not a lay-up, Yahoo could draw interest from private equity, telco companies, the data/marketing services world or from more traditional internet and media players,” FBR & Co analysts wrote in a note published before the announcement.
AT&T Inc and Verizon Communications Inc could be possible buyers for the internet business, FBR said.
Verizon said on Monday it could look at buying Yahoo’s core business if it was a strategic fit.
Yahoo’s plan to spin off its stake in Alibaba hit a hurdle in September when the IRS denied the company’s request for a ruling on whether the transaction would be tax-free.
If the IRS had determined that a spin-off was taxable, Yahoo shareholders could have lost billions in taxes.
Activist investor Starboard Value LP asked the company in November to drop its plans and sell its core search and display ad businesses instead. Starboard had previously supported the spinoff.