SAN FRANCISCO — The slump that’s dragged down Yahoo shares about 30 percent since May shows that investors are doubtful the company will be able to exit its Alibaba Group Holding stake without incurring a multibillion-dollar tax bill.
“There is a less than 50 percent chance that Yahoo is able to divest its Alibaba stake on a tax-free basis,” Gene Munster, an analyst at Piper Jaffray & Co., wrote in a note to investors Wednesday. “As we’ve previously written, we believed that shares of Yahoo already seemed to be pricing in this outcome.”
Yahoo’s stock decline began in mid-May, when the Internal Revenue Service raised red flags over spinoffs like the one Yahoo has been planning. The shares rose 2 percent to $31.52 at the close in New York on Wednesday, a day after Yahoo said the IRS wouldn’t give it a preliminary green light to pursue the transaction. The IRS “was not ruling adversely on the request,” Yahoo said in a regulatory filing.
Failure to get a decision by the IRS reinforced speculation that Yahoo Chief Executive Officer Marissa Mayer wouldn’t be able to pursue her strategy of selling the $24 billion stake in a tax-efficient manner — potentially saving about $9 billion in U.S. taxes. Yahoo announced plans in January to conduct a tax-free spinoff of its shares in the Chinese e-commerce giant, seeking to maximize the return of cash to shareholders.
The Alibaba spinoff is a critical step for Mayer after coming under pressure from Starboard Value LP and other investors to return cash to shareholders, find ways to cut taxes and avoid major acquisitions.
Neil Doshi, an analyst at Mizuho Securities USA Inc., said Yahoo has options beyond the spinoff. The company could spin off the core operating business into a new operating entity, he said, similar to what EBay Inc. did with PayPal Holdings Inc. this year, he said. That would help save on taxes. Another option would be selling the stake to a foreign company.
“There’s a potential for a plan B or a plan C here,” Doshi said.
Yahoo said Tuesday that it sought advice from its legal advisers, who said the IRS’s actions hadn’t changed their opinion that the Web company can satisfy the requirements for tax-free treatment of the spinoff. The Sunnyvale, California- based company said it would consider its options, including proceeding with the spinoff based on its lawyers’ opinion.
Analysts at Morgan Stanley wrote that a favorable opinion from Yahoo’s legal team “suggests a high probability the tax- free spin will succeed.”
Scott Levine, a tax partner at the Jones Day law firm, said he wasn’t surprised that the IRS didn’t grandfather Yahoo’s request, even though it was submitted months before the government signaled that it was rethinking some of its policies. If he were advising Yahoo, Levine said he would urge the company to move sooner rather than later in the event the IRS decides to change its policy. So far, the IRS hasn’t provided any detail on whether and how it will alter its approach.
“They’re still being very coy about it,” he said.
