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Yahoo’s key deal hits US tax snag
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A crucial deal for Yahoo has hit a snag after the US Internal Revenue Service refused to bless the Internet company’s proposed spinoff of its US$23 billion stake in Alibaba Group as a tax-free transaction.
Despite the rebuff, Yahoo emphasized the IRS didn’t rule out the possibility that the spinoff could still be completed without triggering taxes on the profits that the company has accumulated from its initial US$1 billion investment in Alibaba, which runs some of China’s most popular online services.
Even so, Yahoo withdrew its request for an IRS ruling on the matter, according to a Tuesday regulatory filing.
The IRS’s indecision raises uncertainty about the value of Yahoo’s most prized asset and could intensify pressure on CEO Marissa Mayer to boost the company’s slumping stock. The proposed spinoff is now in “uncharted territory,” Evercore analyst Ken Sena wrote in a note.
Yahoo is still proceeding with its plans to place the Alibaba stake and a small-business service into separate company called Aabaco Holdings, while its board members “carefully consider” other options, according to the regulatory filing.
Yahoo’s stake is worth about US$23 billion, down from US$40 billion at the start of the year.
The Alibaba holdings will be worth even less if Yahoo has to pay taxes on its gains. If the Alibaba stake is taxed, it will be worth about US$22 per share to Yahoo stockholders instead of US$31 per share in a tax-free spinoff, Sena estimated.
Yahoo “is likely to face a higher bar to satisfy tax authorities, and this news will at least lengthen the process for the proposed spin,” Sena wrote.
Mayer has been hoping to complete the spinoff by the end of this year.
The spinoff may now hinge on the opinion of Skadden, Arps, Slate, Meagher & Flom, the law firm assessing the tax implications of the deal. The firm told Yahoo that the IRS’s ruling didn’t reflect any change to US laws, nor would it prevent its attorneys from making their own determination about whether the deal can be done tax free.
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