What The Alibaba Spinoff Will Mean For Yahoo Investors Present And Future

Yahoo! Inc. (NASDAQ:YHOO) has decided to forge ahead with its plans to spin-off its stake of 384 million shares of Alibaba Group Holding Ltd (NYSE:BABA), despite not receiving a favorable ruling from the IRS for the plan, which could leave it subject to a tax bill in the billions of dollars at some point in the future. The IRS also recently expressed concerns over deals like the one Yahoo is planning, in which valuable assets such as real estate holdings are spun-off into a business with minimal operations in a tax-free transaction, though it didn’t specifically mention the Yahoo situation. Such has been a growing trend in the retail sector of late, with Macy’s, Inc. (NYSE:M) and Sears Holdings Corporation (NASDAQ:SHLD) among the retailers confirming spinoffs of their real estate assets. Jeffrey Smith’s Starboard Value has been a prominent player in pushing for such moves, including the asset spinoffs planned by both Macy’s and Yahoo, as well as a similar move by Darden Restaurants, Inc. (NYSE:DRI).

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Shares of Yahoo! Inc. (NASDAQ:YHOO) are up by 3.30% in pre-market trading this morning following the news. Some analysts believe the news signals the fact that Yahoo is confident its transaction will not end up being taxed, despite the IRS’s apparent lack of support for it. However, Yahoo may simply be backed into a corner at this point to where it simply needs to risk it and sell the stake one way or the other. With its core business continuing to struggle, the sale could allow Yahoo to look into further acquisitions aimed at growth, in addition to returning a large chunk of the money to shareholders.

There is also the fact that the Alibaba Group Holding Ltd (NYSE:BABA) stake is dwindling in value by the minute. What was once worth over $45 billion shortly after Alibaba’s IPO is now worth less than half that as Alibaba has been ravaged partly by its own underwhelming performance, and partly by the broader concerns over the Chinese economy. Nor has Alibaba necessarily hit rock bottom; Barron’s recently declared that it could lose another 50% of its value given its high valuation even in the wake of its declines this year. Thus a tax bill could be preferable to hanging on to a wilting stock.

Both Alibaba Group Holding Ltd (NYSE:BABA) and Yahoo! Inc. (NASDAQ:YHOO) are down by 45% year-to-date. The smart money tracked by Insider Monkey has shown some faith in Yahoo, which is famously trading in a range that essentially values its operations as worth less than nothing. 104 investment firms we follow held Yahoo in their portfolios on June 30, unchanged from three months earlier.

While hedge fund ownership of Alibaba declined by just one to 85 during the second quarter, investors collectively sold off quite a number of shares during that time. The value of hedgies’ holdings in Alibaba declined by over $1.03 billion to $4.77 billion, even though shares were down by only slightly more than 1% during the second quarter. In Yahoo meanwhile, whose shares fell by more than 10% during the April-to-June period, the value of hedge funds’ holdings fell by less than that, by about $560 million to $5.92 billion. The investors we track held 16.10% of Yahoo’s outstanding shares and just 2.30% of Alibaba’s.

Given all that, it appears this is the wise move for Yahoo to make at the present time, if indeed it has much of a choice. Investors interested in a long-term position in Yahoo will stand to potentially benefit in the near-term. However, they will need to be aware that a hefty hit to the stock could come in the future once the IRS gets around to auditing the transaction.

Disclosure: None