Yahoo unveiled its plan to spin off its nearly $40 billion stake in Alibaba on Tuesday (Jan. 27) -- a plan that effectively eliminates the need to pay taxes on an investment that Yahoo paid just $1 billion for nearly a decade ago.
Under the plan, Yahoo will create a new "investment company" that will inherit ownership of Yahoo's 384 million Alibaba shares when the tax-free spinoff is completed toward the end of 2015, after the expiration of a 12-month lock-up agreement following the Alibaba IPO, which took place in September 2014. Yahoo shareholders will get shares in the new company.
The new company -- which Yahoo's presentation for analysts referred to as "SpinCo," though that almost certainly won't be its name -- will also include a "legacy, ancillary operating business" that Yahoo CFO Ken Goldman wouldn't identify, but that he said is responsible for approximately $50 million of Yahoo's pre-tax earnings.
The new company will assume no debt in the deal, and Yahoo will retain its cash.
The spinoff is subject to various regulatory approvals from the Internal Revenue Service and the Securities and Exchange Commission. The most important one is the IRS private letter ruling to confirm that the spinoff will be tax free. If the spinoff hadn't been properly structured, Yahoo would have had to pay about $16B of the Alibaba stake's $40 billion value in taxes, CEO Marissa Mayer said during a conference call with analysts on Tuesday afternoon.
Speculation over what Yahoo would do about its stake in Alibaba -- and especially how it would handle the tax consequences -- has ranged from assumptions that Yahoo would completely fumble the tax issues to suggestions that Alibaba might buy Yahoo outright to resolve the problem.
Once the spinoff is completed, Yahoo shareholders could cash out of Alibaba stock on their own. But the spinoff could also give the Chinese e-commerce giant the chance to buy back those shares at a lower tax rate than if it tried to acquire them now, the Wall Street Journal reported.
The newspaper also quoted Bob Willens, an independent tax expert on corporate structures, who called Yahoo's restructuring the simplest and most effective move the company could have made. Willens also said the spinoff enables Alibaba to buy the new entity with its own shares in a stock-for-stock deal. Such a deal could happen almost immediately after the spinoff is completed, and would still avoid the tax bill as long as Alibaba and Yahoo haven’t negotiated or agreed on such a deal before the spinoff, Willens said.
After the spinoff, Yahoo will continue to operate its core business and hold its 35.5 percent interest in Yahoo Japan. Yahoo didn't dissolved that joint venture with SoftBank at the same time as the Alibaba-investment spinoff because "we wanted to be sure we did the Alibaba [spinoff] and did it right," CFO Ken Goldman said.
Investors sent Yahoo shares up more than 10 percent in late trading after the spinoff news broke, despite the fact that Yahoo's Q4 revenue declined 2 percent to $1.18 billion, falling short of analyst expectations.