Yahoo! Inc. did not receive the advance approval it so badly wanted from U.S. authorities for a tax-free hive-off of its stake in Alibaba Group Holding Ltd . The internet pioneer may decide to anyway proceed with the transaction.
According to a SEC filing late Tuesday, the U.S. Internal Revenue Service told Yahoo that it won’t grant its request for a ruling. Following the decision, Yahoo withdrew its petition. Yahoo however clarified that the IRS “was not ruling adversely on the request.”
“Yahoo’s board of directors will continue to carefully consider the company’s options, including proceeding with the spin-off transaction on the basis of an opinion of counsel,” the firm said in the filing.
Marissa Mayer Under Pressure
The failure to extract a favorable decision from the IRS has cast uncertainty over how and when Yahoo! Inc. will monetize its $23.5 billion stake in the Chinese e-commerce giant. Marissa Mayer had announced plans to conduct a tax-free spin-off of its Alibaba shares in January.
The Alibaba Group Holding Ltd sale is critical for Mayer after coming under increased pressure from Starboard Value LP to return cash to shareholders and find ways to cut costs.
In order to fulfill IRS’ requirement for a tax-free spin-off, Yahoo had even offered to include its small business unit with the Alibaba Group Holding Ltd shares. The process appeared well-on track until May, when an IRS official raised questions about certain rules. In July, the federal tax agency officially announced it was studying new guidance on the transaction.
Yahoo Should Close the Deal at the Earliest
With fresh doubts hovering over Yahoo! Inc. ’s planned Alibaba spin-off, analysts are anxious that the value of the proposed deal could be more than halved by taxes. To get a sense of how bad a tax hit Yahoo could experience, you just need to follow what Mizuho Securities analyst Neil Doshi had to say after the second quarter earnings.
According to Doshi, if the transaction were to be taxed at a rate of 45 percent, Yahoo’s stake in Alibaba Group Holding Ltd would be worth around $8.4 billion, or $9 a share. Contrast that with what a tax-free deal will yield – $23 billion, or $25 a share! That Mizuho report was dated July 22, before Alibaba’s shares took a deep dive. So the numbers will be much worse now.
Investors were hungry to get their hands on the huge cash pile locked up within Yahoo. After the recent ruling, the likelihood of that happening seems dim.
However, that could change if Yahoo! Inc. decides to get tough with the IRS, and closes the deal sooner than expected. Historically, the IRS has avoided challenging the tax treatment of public deals once they are closed. No one at the agency would want to go after thousands of individual shareholders for unpaid taxes. The public outcry would be huge. Therein lays the only hope for investors.