3 Scenarios Where Yahoo's (YHOO) BABA Spin Could Lose 2/3 of its Value to Taxes

Bob Peck, analyst at SunTrust Robinson Humphrey, published a note this morning highlighting the risk that Yahoo!'s (NASDAQ: YHOO) Alibaba spin off could not just be taxable, but taxable at a rate that is much higher than people expect. If the IRS rules the deal to be a taxable transaction, the tax risk could be larger than most expect, even as high as 65% of the Alibaba value. If that large of a risk were the case, the board could need to pause and consider alternative transactions.

There are 3 scenarios that Peck believes could increase the tax burden:

1) IRS taxes the spin and Aabaco pays the ~$12B to Yahoo per the indemnification agreement;

2) the indemnity itself may be taxable, creating another ~$4B of tax liability that Aabaco will need to defray;

3) China could decide to tax the spin - an addl. $3B tax burden. At current prices, that would imply ~$19B in taxes that Aabaco would need to pay (likely by selling ~240M of its ~384M BABA shares)

Jackie Reses, who was instrumental in the managing the spin process, recently left, creating uncertainty and hints that there could be other senior executive departures. (http://www.forbes.com/sites/ryanmac/2015/10/19/square-hires-female-executive-jacqueline-reses-away-from-yahoo-ahead-of-ipo/). One interesting idea is to have Marissa Mayer focus on the most valuable asset (Aabaco), while a different executive focused on the core.

Despite the increased variability of outcomes, the risk was to the upside (40% up and 15% down) so Peck maintained his Buy rating and $40 PT.

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 $35.05 yesterday.

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