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Tax concerns on Yahoo's Alibaba stake spinoff prompt target cuts

Thursday, September 10, 2015 - 08:15
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Wall Street analysts tempered their view on Yahoo Inc's stock after the company's plans for a tax-free spinoff of its stake in Alibaba Group Holdings Ltd ran into a potential problem with the US Internal Revenue Service.

[NEW YORK] Wall Street analysts tempered their view on Yahoo Inc's stock after the company's plans for a tax-free spinoff of its stake in Alibaba Group Holdings Ltd ran into a potential problem with the US Internal Revenue Service.

Yahoo said on Tuesday the IRS had denied its request for a private letter ruling (PLR) on a possible tax-free deal that could fetch it US$23 billion.

PLRs are requested when a company wants to confirm if a prospective transaction could result in a tax obligation.

The IRS could approve or deny the tax-free status later. The spinoff is planned for later this year.

At least nine brokerages cut their price targets on the stock, but kept their recommendations unchanged.

Yahoo's shares were up 1.6 per cent at US$30.57 in early afternoon trading on Wednesday after trading lower much of the morning. "We believe the likelihood of a positive tax outcome for the company diminishes as more time passes; this remains the core overhang on Yahoo's valuation," Nomura Equity Research analysts said in a research note.

Yahoo's stock has lost more than a quarter of its value in the past year as the company struggles to revive its core online advertising business.

Still, analysts are largely positive, linking much of the company's value to its stake in Alibaba and Yahoo Japan Corp .

Of the 42 analysts covering Yahoo, eight rate it a "strong buy," 19 a "buy" and 15 a "hold." The IRS's denial is "not a good sign, but there is still hope," said Barclays Capital analyst Paul Vogel, who cut his price target to US$35 from $45.

Piper Jaffray & Co was the most bearish on the stock, slashing its target by US$22 to $32. "Given this new information, it would now seem there is a less than 50 per cent chance that Yahoo is able to divest its Alibaba stake on a tax-free basis," the brokerage said in note.

The stock fell about 16 per cent in post-market trading immediately after the announcement.

Yahoo said it would weigh its options, including proceeding with the spinoff. But a failed deal will put more pressure on Chief Executive Marissa Mayer, whose turnaround efforts have had little effect on Yahoo's growth.

The company may also consider other alternatives, such as a spinoff of Yahoo's core business with the company's Alibaba and Yahoo Japan stakes left behind in the current corporate structure, analysts said.

REUTERS