Yahoo shares had run up to a 14-year closing high of $52.37 on November. 17, the height of the Alibaba hysteria, about two months after Alibaba’s record-breaking initial public offering.
Yahoo had sent a private letter to the IRS executives seeking green signal for the spin off. This was done to satisfy their investors, in particular. Although Yahoo is taking this action with a few degree of confidence that the transaction will be tax free, the IRS could still decide to tax this transaction after it is completed.
Yahoo Inc said it is on track to spin off its almost 15 percent stake worth about $22 billion in China-based Alibaba Group Holding Ltd this year into a separate corporate entity called Aabaco Holdings Inc. Yahoo’s shares are down 45% this year, and Alibaba’s shares are down nearly 45% as well.
The changed scenario is no doubt a disappointment for shareholders who invested in Yahoo!, hoping for a tax-free payout, when the deal closes by the fourth quarter.
In a separate, amended version of its own SEC filings, Aabaco said that although its attorneys – the law firm of Skadden, Arps, Slate, Meagher & Flom – have said that they expect to be able to issue an opinion that the share spinoff would be tax exempt under current United States of America law, there are still risks. A few analysts believe the news signals the fact that Yahoo is confident its transaction will not end up being taxed, despite the IRS’s apparent lack of support for it. However, Yahoo may simply be backed into a corner at this point to where it simply needs to risk it and sell the stake one way or the other.
Nevertheless, the search company will still have its core business along with a 35.5 percent stake in Yahoo Japan. But since this sale will occur during Q4 and there is little indication that anything major will substantively improve Alibaba’s standing in the short term, this means that Yahoo will be spinning off its remaining stake in Alibaba significantly below its IPO price.
Yahoo also said the spinoff will be listed on Nasdaq under the ticker symbol AABA.
Yahoo! carries a Zacks Rank #3 (Hold).