For all the concerns about the potential tax liabilities from Yahoo spinning off its stake in Alibaba, it seems investors are now shaken by the board’s decision not to do it. In fact, amid all the calls to spin off the core business instead, Yahoo has decided to do just that. The company’s shares declined by as much as 3.49% to $33.63 per share during regular trading hours today following the official confirmation of the plan.
Yahoo saves on taxes
Yahoo owns approximately 384 million shares of Chinese e-commerce giant Alibaba, which was worth about $32 billion pretax or $34 per share of Yahoo. That valuation plunges to $21 per Yahoo share when fully taxed, however, according to Jefferies analysts Brian Pitz and Brian Fitzgerald. If Yahoo had gone ahead with the spinoff of its Alibaba stake, it would have come with a tax bill of approximately $12 billion.
Sterne Agee CRT analyst Robert Coolbrith pegs the tax liability of the previously planned Yahoo spin at about $8 per share and the potential tax bill much higher at about $13.3 billion. So needless to say, the decision not to spin off the Alibaba stake, which is worth much more than Yahoo’s core business will save quite a lot of tax money.
Yahoo’s new spin plan
Instead of proceeding with the Aabaco spin, Yahoo has decided to reverse course and instead spin off its core business. Coolbrith notes that taxes on spinoffs apply to assets that are controlled, which means that the worst-case tax scenario for spinning off the core business is about $5.3 billion – much lower than what the bill would have been on the Alibaba spinoff because the value of the assets being spun off is much lower.
The analyst sees this as being the worst-case scenario because he’s assuming that the reverse spin still gets a tax-free structure. He added that even if the IRS bars the possibility of Yahoo completing the reverse spin tax-free, the company could instead just sell its stake in Yahoo Japan and instead do a taxable spin or sale of its core business. He also believes that Yahoo could have “substantial investment basis” in connection with the many acquisitions it has made since CEO Marissa Mayer took the helm. This could reduce the company’s tax liability even more if the transaction ends up being taxed.
It’s expected that a spinoff of Yahoo’s core business will be much more complex, so the company believes it could take at least a year to complete it. Coolbrith maintains his $50 per share price target and Buy rating on Yahoo in light of the new plan.
What is Core Yahoo worth?
The Jefferies team noted that at its current equity valuation, Wall Street is not assigning much value to Yahoo’s core business. From their sum of the parts analysis, they estimate that the Alibaba stake is worth about $21 per share, the stake in Yahoo Japan is worth $5 per share, and Yahoo’s cash is at $6 per share, which grants the company a value of $32 per share in total.
At $35 per share, it implies that the core business is only worth $3 per share, and at current levels, the market values the core business at less than $2 per share. Further, the Jefferies team noted that if assigning a “material level of value” for any tax savings on Yahoo’s Asian business, Core Yahoo gets a valuation in the negative.
Coolbrith argues that Yahoo should be worth at least $43 per share right now and believes that investors should be applying tax discounts for the Yahoo Japan stake and Core Yahoo instead of the Albibaba stake.
Yahoo still struggling to challenge Google in search
In other Yahoo-related news, Core Yahoo’s search business continues to struggle in the fight against behemoth Google. According to new data from StatCounter, the company’s share of U.S. searchers hasn’t changed much since Mayer became CEO. Investors have been counting on her to complete a turnaround and get the business back on track, but this struggle is likely one of the main reasons investors don’t see Core Yahoo as being worth much at all, if anything.
Mayer became Yahoo’s CEO in July 2012, and at that time, the company held a 7.6% share of the U.S. search market. StatCounter’s data indicates that last month, its share of the market was 7.4%, indicating that no forward progress has been made in this area. This means Yahoo’s share of the U.S. search market has declined 2.6% since Mayer took over the reins. Further, the company’s share of the market has declined throughout the year after peaking at 10.2% in the U.S. in January following the deal with Mozilla to make Yahoo Firefox 34’s default search engine.
Yahoo isn’t the only search engine to struggle against Google, however, as Bing has also ceded share over with its share of the U.S. search market declining from 9.25% to 7.81% since July 2012. Over the same time frame, Google’s share of the market increased 1.3% from 82.4% to 83.5%. Google also holds a commanding share of the global search market at 91.5%, a slight decline from the 91.75% share it held in July 2012.
