Yahoo's (YHOO) Aabaco Spinoff Could Lose All Value to Taxes - SunTrust's Peck

SunTrust Robinson Humphrey analyst, Bob Peck, is concerned that Yahoo's Yahoo! (NASDAQ: YHOO) Aabaco spinoff may not be tax free and if so, and in a worst case scenario the tax burden could eat up the entire profit from the transaction. Notes follow:

The transaction is likely tax free since it complies with Section 355's requirements where business purposes outweigh any concerns on whether it is primarily a "device" to transfer gains. However, Robert Wellen of the IRS has been more vocal since the IRS’ September 14th release.

Any tax ruling wouldn't take place till 2017 after reviewing Yahoo's 2016 filed docs. It could also have to decided in court which would also prolong the process. As investors await Skadden Arp's "will" letter, it is our understanding that the letter would carry no liability and even if the spin proceeds with the "will" letter, the IRS could ultimately tax the transaction. Hence, ultimately the Aabaco shareholders would bear the risk.

Peck's probability weighted price target assumes there is a <10% chance of a negative tax outcome and a >90% chance the spin is tax free leading to an equity value of ~$40 per share. No change to Buy rating or $40 price target.

For an analyst ratings summary and ratings history on Yahoo! click here. For more ratings news on Yahoo! click here.

Shares of Yahoo! closed at $32.86 yesterday.

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