Offing Alibaba

September 23, 2015 09:00 AM

Yahoo continues to take steps toward a tax-free spin-off of Yahoo’s stake in Alibaba Group (BABA), into an entity called Aabaco Holdings. On July 17, 2015, Yahoo! Inc. (YHOO), trading at $39.73 with a market capitalization of $37.3 billion, filed a Form N-2 with the Securities and Exchange Commission in connection with the spin-off (see “Key data”). 

Under the spin-off plan, announced on Jan. 27, 2015, Yahoo plans to distribute all of the outstanding shares of Aabaco Holdings pro rata to its shareholders. Immediately after the spin-off, Aabaco will own approximately 384 million shares of Alibaba Group, representing an ownership interest of approximately 15% in Alibaba, and a 100% ownership interest in Yahoo Small Business. The spin-off is expected to be completed in the fourth quarter. As of July 28, Yahoo’s 15% ownership of Alibaba accounted for 87% of Yahoo’s market capitalization. Each share of Yahoo has 0.4066 worth of Alibaba stock embedded.

Yahoo’s network of websites offers news, entertainment and shopping, as well as search results powered by Microsoft’s Bing. Yahoo generates most of its revenue through providing search and display advertising to web operations in three categories: Communications and communities (including Yahoo! Mail, Yahoo! Groups and Flickr), search and marketplaces (Yahoo! Search) and Media (Yahoo! Homepage, Yahoo! Finance). Other revenues come from fee-based services such as premium e-mail, royalties, licenses, mobile products and broadband Internet access. The company primarily generates revenue through display and search advertising and currently holds 15.4% of Alibaba and 35.5% of Yahoo Japan. 

Alibaba is a treasure trove of e-commerce websites in Asia. The holding company owns, a leading online marketplace for importers and exporters in China and Japan. Alibaba also owns Alibaba Cloud Computing, which supports its technology platform; Taobao and Taobao Mall, China’s largest online retail websites and Web portal China Yahoo! Altogether, Alibaba websites count millions of registered users. 

We believe that Yahoo’s stock price does not reflect a tax-efficient spin-off of Yahoo’s investment in Alibaba. We calculate the intrinsic value of Yahoo to be $51.50 (assuming spin-off transaction is tax-free), using the sum-of-the-parts (SOTP) analysis. Our fair value for Yahoo suggests upside potential of about 30% from the current level of $39.73. We assign a modest estimated value to EBITDA multiple of 5X to value the core Yahoo business. The values of the stakes in Alibaba and Yahoo Japan are calculated using the current market prices. There appears to be widespread skepticism that Yahoo will be able to execute a tax-free spin off of the Alibaba shares. A tax-efficient spin-off is likely to be completed by year-end and will create value for Yahoo shareholders.

About the Author

Joe Cornell is a chartered financial analyst, a finance MBA and the author of McGraw-Hill’s “Spin-Off To Pay-Off.” As the founder and publisher of Spin-Off Research ( he is widely-regarded to be among the foremost experts in this specialized area. @spinoffresearch