BACKGROUND: Yahoo has filed an application with the IRS for approval of a tax-free spin-off of its stake in Chinese e-commerce giant Alibaba (BABA). Isaac Zimbalist, a senior technician reviewer at the IRS Office of Associate Chief Counsel, said yesterday that the agency is considering changes to tax rules that affect spun off companies, Bloomberg reported. Yahoo's stock dropped 7.9% yesterday, but the company said this morning that it understands that the IRS’s statement is not specific to Yahoo’s planned Q4 spin-off of its remaining Alibaba stake, reflects no change in applicable law, and does not affect previously filed ruling requests. Yahoo's stake in Alibaba was valued at $40B when it announced the spin-off, while investors are assigning little or no value to the company's core business, a number of analysts have said.
ANALYST REACTION: In a note to investors today, Cantor Fitzgerald analyst Youssef Squali wrote that Zimbalist's statement creates "a cloud of uncertainty" about Yahoo's spin-off of its Alibaba stake. Nevertheless, tax rule changes will not reduce the value of Yahoo's stock by more than $16, according to the analyst, who currently estimates the fair value of the shares at $60. The analyst kept a Buy rating on the shares, which were changing hands for around $42 in mid-morning trading. Similarly, Morgan Stanley analyst Brian Novak wrote that the stock's reaction yesterday almost fully discounted a worst-case scenario. The decline creates a buying opportunity, according to Novak, who kept a $59 price target and Buy rating on the shares. Analysts at SunTrust echoed the sentiment that Yahoo's current levels reflect a worst case scenario of a spin-off at a 40% tax rate. The firm also said it does not believe that the IRS would use such an employee to communicate important news and it kept a $59 price target and Buy rating on the shares.
PRICE ACTION: In mid-morning trading, Yahoo rose 3.6% to $42.45.