Shares of Yahoo! Inc. (YHOO) jumped 6.7% to $51.20 in afterhours trading following the Internet search firm’s announcement of plans related to its remaining stake in China tech giant Alibaba (BABA). Yahoo! plans to return $40 billion in holdings to shareholders by spinning off its stake in Alibaba.
The holdings will be spun off into a newly formed, tax-free independent, publicly traded investment company, called SpinCo. Investors reacted positively to the highly anticipated decision as it will enable the company to avoid a tax bill that would have cost billions in the future.
When Alibaba went public, Yahoo was forced to sell 20% of its holdings in the company. The company had to spend $3 billion in taxes on the move. The latest move will release a significant amount of capital without having to pay more in taxes.
The spinoff is likely an effort to make sure that SpinCo shareholders benefit from future sales of Alibaba stock and are taxed at a lower rate than. Yahoo would have to pay had it held on to the interest in Alibaba. However, the tax-free spin-off would make Yahoo a much smaller company than it has been in years, largely due to the removal of BABA shares from its net worth.
Following the spinoff, Yahoo will continue its core business operations and hold its 35.5% stake worth $7 billion in Yahoo Japan. Yahoo can now fully concentrate on pursuing significant growth.
The tax-free spinoff is expected to be closed by the fourth quarter of 2015. The one-year lock-up agreement with Alibaba will also expire by then. Following the completion, SpinCo will get ownership of Yahoo's remaining 384 million shares in Alibaba, valued at $40 billion. Existing Yahoo! shareholders will get stock of the new company. Moreover, SpinCo will assume no debt in the transaction and Yahoo will keep its cash.
For this deal, BofA Merrill Lynch, Goldman, Sachs & Co, and J.P. Morgan Securities LLC, are financial advisors while Skadden, Arps, Slate, Meagher & Flom LLP are official counsel to Yahoo.
Along with this Yahoo also reported earnings for the fourth quarter and fiscal 2014. Earnings of 20 cents per share (before adjusting for stock-based compensation) beat the Zacks Consensus Estimate by a penny. Moreover its revenues of $1.253 billion also surpassed the Zacks Consensus Estimate of $1.183 million.
Yahoo shares carry a Zacks Rank #4 (Sell). Better-ranked stocks include Ellie Mae, Inc. (ELLI) and Expedia Inc. (EXPE), both sporting a Zacks Rank #1 (Strong Buy).
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