Yahoo! Inc. (NASDAQ:YHOO) reports its latest quarterly results after closing bell today, and Stifel analysts suggest that the company’s shares could go higher. They recently updated their sum of the parts analysis to $41 per share, and their latest note offers three possible scenarios.
What’s included in Yahoo!’s sum of the parts
Analysts Jordan E. Rohan and Michael B. Purcell say they have included full taxation of Alibaba.com Limited (HKG:1688) and Yahoo, but it doesn’t necessarily have to be that way. They said their model doesn’t assume that Yahoo! Inc. (NASDAQ:YHOO) figures out how to either distribute or exchange the last tranche of its stake in Alibaba in a tax efficient way. It also doesn’t assume a tax efficient exit of its one-third stake in Yahoo! Japan.
Together, the tax savings on these two assets could add $11 per share to their price target, with $6.60 coming from the Alibaba stake and $4.27 coming from Yahoo! Japan.
Yahoo! could do a cash rich split
Although the Stifel analysts believe this scenario is unlikely, they suggest that it could happen because of “the magnitude of the gains that Yahoo may be trying to shield.” They also note that in a cash rich split, there has to be multi-level cooperation between the buyer and seller, which they think is unlikely because of contention between management at Yahoo and Alibaba.
The analysts said that in the past when Alibaba was valued at between $35 billion and $40 billion, a cash rich split might be more likely because Yahoo! Inc. (NASDAQ:YHOO) would be able to save “a few billion dollars in taxes.” However, they said at this point “the stars need to align” in order for it to work. They said because of how much Alibaba’s value has increased, the amount of tax savings possible is much higher than any similar transaction that they are able to locate. This means that the IRS may be unlikely to approve a cash rich split. In addition, Alibaba or a related entity would have to have $12 billion in cash lying around to send to Yahoo, which they also view as unlikely.
Overall, they see this scenario as too complicated because of all the moving parts.
Yahoo could offer a dividend for Alibaba stake
From a financial and tax standpoint, the Stifel analysts see this possibility as being more likely. They note that Yahoo! Inc. (NASDAQ:YHOO)’s investment in Alibaba.com Limited (HKG:1688) has a tax basis of almost zero. If Yahoo sells its shares, either to Alibaba or in the open market, it would have to pay a 38 to 40 percent corporate tax rate. Instead, they suggest that Yahoo could offer a stock dividend of 10 shares of Alibaba common stock for every 100 shares of Yahoo owned. This would save on taxes and provide bonuses investors may be interested in.
They said it would be easier if Alibaba lists on an exchange in the U.S., but once again, there is cooperation involved that might be a problem. Also the IRS would have to approve this.
Yahoo could spin off its Asian operations
Stifel analysts say this third scenario is “the most intriguing” of the three they have offered. It not only offers tax efficiency, but also enables the search company’s domestic and international businesses to be buyable for both private equity and strategic buyers. They note that part of the problem with valuing shares of Yahoo! Inc. (NASDAQ:YHOO) is the fact that the company’s stake in Alibaba is obscuring some of its value.
But once again the IRS would have to approve this, and spin-offs take at least two years to complete if they’re going to be tax efficient. The terms between Yahoo and Alibaba may also need to be renegotiated.
