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Many birds and stones

13 February 2012 By Robert Cyran

Yahoo sounds closer to finding a solution for its long-running Alibaba problem. A mostly cash split-off promises a tax-efficient way for the troubled U.S. Internet firm to slash its stake in its Chinese rival. But the deal is getting so elaborate, it could dilute the benefits for Yahoo shareholders.

The 40 percent stake Yahoo owns in privately held Alibaba is worth about $14 billion, based on an estimate of the whole company produced last October by another shareholder, Softbank. Yahoo’s stake in listed Yahoo Japan is worth about $6 billion. Yet the enterprise value of Yahoo, which is still profitable despite its strategic problems, is under $19 billion, or less than the two Asian stakes alone. The trick to unlocking value has been how to dismember the firm while minimizing the taxman’s cut.

Under the scheme being talked about, Alibaba would inject up to $6 billion of cash and $3 billion of assets into a new subsidiary. Yahoo would take control of it in exchange for reducing its stake in Alibaba to 15 percent. It would be designed for the Internal Revenue Service to deem the transaction asset-shuffling rather than a sale and consider it tax-free.

That’s good news for Yahoo investors, who have been saddled with a non-controlling stake in, and often contentious relationship with, far-flung Alibaba. But even in a best-case scenario, Yahoo will probably still be stuck with a $5 billion stake in the Chinese firm. What’s more, because Alibaba is unlisted, the value at which it can even partially extricate itself fairly is hard to determine.

The deal stands to be further complicated because a slug of the assets Alibaba is to inject into the new vehicle might be ones it doesn’t yet own. Yahoo would have some say over the purchases, but this potentially gives would-be sellers more negotiating leverage, introduces additional parties into the new Yahoo entity, invites more regulatory scrutiny – and therefore reduces clarity for investors. The cleverer Yahoo tries to be untangling itself from China, the less value the whole transaction could create.


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