Tax scare on Yahoo's Alibaba stake spin-off seen premature

Wed May 20, 2015 5:52pm EDT
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By Supantha Mukherjee and Abhirup Roy

(Reuters) - Yahoo Inc's (YHOO.O: Quote) planned spin-off of its stake in Alibaba Group Holding Ltd (BABA.N: Quote) is likely to proceed on a tax-free basis, analysts said, as Yahoo shares regained most of their losses after concerns of a possible change in U.S. tax rules spurred a slide on Tuesday.

The stock closed up $1.81 to $42.73 on the Nasdaq on Wednesday. It fell $3.38 on Tuesday, wiping more than $3 billion off its market value after a U.S. Internal Revenue Service (IRS) official said it may consider a change to its spin-off rules.

"Anything can happen, but I'm going with the bet that this won't impact spin-off of Alibaba shares for Yahoo," Axiom Capital analyst Victor Anthony told Reuters.

A tax-free spin-off of the Alibaba stake was "more than likely", Raymond James analysts said but reduced its probability estimate to 60 percent from 80 percent.

A change in tax rules, however, will pose some risk to the company's ability to spin off Yahoo Japan, Anthony said.

The search giant said last month it had hired advisers to help evaluate options for its Yahoo Japan stake, which analysts estimate could fetch more than $5 billion after tax.

Yahoo plans to spin off a $34 billion stake in Alibaba into a public company along with Yahoo Small Business that provides domain names and local marketing. It submitted a request to the IRS in the first quarter regarding the spin-off.

Current rules make a spin-off tax free if the entity being separated has an active business.   Continued...

A Yahoo logo is pictured in front of a building in Rolle, 30 km (19 miles) east of Geneva, in this file picture taken December 12, 2012.  REUTERS/Denis Balibouse