Yahoo’s valuation continues to rest on Alibaba’s and Yahoo Japan’s valuation even though the company is making plans to spin off its stakes in both. Uncertainty about the tax implications of the spinoff continues to swirl, and so analysts are trimming their price targets for both Yahoo and Alibaba.
Yahoo price target to $48
UBS analyst Eric Sheridan and his team said they trimmed their target for Yahoo from $51 to $48 per share because they trimmed their price target for Alibaba from $101 to $93 per share. This has been a common theme among many firms for months. The reason they cut their price target for Alibaba was revenue headwinds from the macro environment in China. They maintained their Buy rating on Yahoo.
Yahoo’s stock price has been hovering in the $30s for the last couple of months, and the UBS team said the current share price assumes little to no tax efficiency in the Alibaba and Yahoo Japan spinoff. They added that Yahoo’s current valuation assumes about a 41% tax rate on the company’s holdings in both Alibaba and Yahoo Japan.
That’s based on their assumption that the core of Yahoo is worth five times EV/ EBITDA on their 2016 EBITDA estimate. It also assumes that Yahoo’s second quarter ending cash balance and diluted share count remain the same.
Still hope for Yahoo’s Aabaco spin
The UBS team also notes, however, that the IRS has not outright said “no” to a tax-free spin for Yahoo’s proposal to spin off Aabaco (the name of the proposed new company), so there is a chance of that still. The IRS will make a final decision on that when the company moves forward with the transaction. Because of this fact, Sheridan and his team believe that Wall Street is discounting Yahoo too much.
Sterne Agee CRT analyst Robert Coolbrith also reduced his price target on Yahoo because he trimmed his target for Alibaba as well. His new target for Yahoo is $52, down from $59 per share, while his target for Alibaba falls from $110 to $93 per share.
He believes the IRS’ decision not to rule on the Aabaco spin is “highly politicized” and is encouraged that Yahoo didn’t receive a negative ruling on it yet. He believes that the tax code and precedent rulings will not support making that spin taxable and that Yahoo can proceed with the spinoff without the PLR, which the IRS rejected. He notes that the agency has previously limited its granting of PLRs on spinoffs.
Further, Coolbrith said Yahoo’s share price assumes the worst-case scenario on taxes for the Aabaco spinoff. As of this writing, shares of Yahoo were down 0.1% at $31.12 per share.