Will Alibaba Eventually Buy Yahoo Spinoff?

A Bloomberg columnist proposes an interesting endgame for Yahoo's latest move to capitalize on its Alibaba share holdings.
Katie Kuehner-HebertJanuary 28, 2015
Will Alibaba Eventually Buy Yahoo Spinoff?

Bloomberg View columnist Matt Levine Tuesday very tongue in cheek described why Yahoo is creating a spin-off company holding its $40 billion worth of Alibaba shares: Yahoo could possibly later sell the spin-off to Alibaba and also perhaps so Yahoo could avoid the temptation to sell the shares now, take a tax hit, and then invest the proceeds “in some harebrained scheme.”

Levine says the most likely scenario would be for the spin-off, tentatively named SpinCo, to wait a year before selling itself to Alibaba because the Internal Revenue Service states there can’t be a prearranged agreement without a tax hit. Eventually, Alibaba should be able to buy SpinCo at a $1 billion to $2 billion discount to the $40 million worth of Alibaba shares SpinCo owns – but that’s still much better for Yahoo than getting $24 billion for the shares after a tax hit.

“I don’t know if that’s the plan, but it would be sort of nuts if it isn’t!” Levine wrote. “SpinCo is an utterly pointless beast. It is a one-stock mutual fund. Wouldn’t you rather have the stock? Yes, you would rather have the stock. Alibaba, similarly, would rather get rid of SpinCo — a weird alternative vehicle confusing its investors and fragmenting its liquidity — especially if it can do so at a discount.”

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Everyone except….you know who — the IRS, Levine wrote.

“This is a tax dodge,” he wrote. “That’s fine! It’s an open and transparent and well understood and perfectly legal tax dodge. In fact, Yahoo expects to get ‘a favorable ruling from the Internal Revenue Service with respect to certain aspects of the transaction and a legal opinion with respect to the tax-free treatment of the transaction.’”

According to a Yahoo news release on Tuesday, Yahoo will create the spin-off by putting its 15.4% stake in Alibaba into a separate company. Included in the spin-off will be an “active trade or business,” a small operating division. Yahoo will then allocate shares in the spin-off to existing Yahoo investors according to the the size of their holdings.

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