MKM Sees Negative Implications of Yahoo!'s (YHOO) Alibaba Spin Already Priced in, Recommends to Buy

MKM Partners affirms Yahoo! (Nasdaq: YHOO) at Buy with a price target of $43 following updated Alibaba asset spin plans.

Analyst Rob Sanderson issued the following commentary earlier Tuesday:

We believe this decision will ultimately maximize value, but is not a clean event path for the stock:

• This decision could potentially put shareholders on the hook for any tax liability should the IRS challenge YHOO’s interpretation of tax treatment in the future.
• We expect this would trigger a legal battle. Tax regulations have not changed and YHOO’s proposal is in compliance with the current tax law.
• Even if YHOO’s position prevails (which many experts believe it will), there is the uncertainty of not knowing whether the IRS will audit in the future and risk that Skadden’s interpretation is denied.
• We think this would present an overhang until clarity arrives.

This uncertainty is however more than fully priced in:

• The current sum-of-parts analysis not only assumes a fully taxed transaction for the BABA spin, it also assumes no value for the core business.
• With a fully taxed BABA spin, fully taxed valuation of Yahoo! Japan and the company’s balance sheet, the total sum-of-parts value is over $27 per share, basically in-line with yesterday’s closing price.
• At the current value of the BABA stake ($22Bn) less YHOO’s cost basis ($2.7Bn), the potential tax liability is $7.7Bn assuming a 40% tax rate. This is over $8 per share.
• We think YHOO’s core business should support a valuation of 4x EBITDA, which implies $4 per share on our current estimates (relatively in-line with consensus).

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

You May Also Be Interested In

• HSBC Downgrades Feng Tay Enterprises (9910:TT) to Hold
• Synovus Financial (SNV) PT Lowered to $42 at Piper Sandler
• American International Group (AIG) PT Raised to $89 at Piper Sandler