BABA Black Sheep? Yahoo’s Aabaco Holdings Spinoff Watches Value Evaporate With Alibaba Stock

Yahoo(YHOO) investors may be learning a costly lesson in the dangers of tax efficiency. Under pressure from investors to maximize the value of its Alibaba(BABA) stake, the company unveiled a plan to spin off the stake, with a small business unit, as Aabaco Holdings. The spinoff was intended to avoid paying $12 billion in taxes. For months, however Yahoo has been under pressure from reports that the IRS may not grant tax free status to the spinoff. Now, with Alibaba disappointing the market with slowing growth, the stock traded below $72 yesterday, down from a high of $120(it has since rebounded above $76).

The Wall Street Journal points out that at yesterday’s price, Yahoo would have received more cash for its stake after taxes than the current pre tax value.

The spinoff, announced in January, was designed to avoid taxes on the disposal of the 384 million shares of Alibaba it still owns. But the Chinese e-commerce giant’s latest slide saw its stock hit a depressing milestone for Yahoo. If Yahoo had been able to sell the shares at Alibaba’s peak of $120 a share on Nov. 10, they would have been worth $46.1 billion. Taxing that at 38% would have yielded theoretical proceeds of about $28.5 billion. By comparison, the shares today are worth about $27.9 billion at Wednesday’s price of $72 and change–before any taxes.

They do add that this is theoretical, as the shares cannot be sold until September, though perhaps there was an opportunity to sell them back to Alibaba.

Yahoo could not sell before a lock-up expires in September, anyway, so even if its trading instincts had been razor sharp it couldn’t have capitalized on them. Still, that it would have paid to simply sell and hand over a chunk of change to the taxman back then compared to now shows just how much value in Yahoo’s biggest asset has ebbed away.

Of course, if they can get tax free status for the spinoff, they will still take home significantly more cash that way than they would by selling in a taxable transaction. Meanwhile, the company continues to hold a valuable stake in Yahoo Japan, and, if you squint, there may be some signs that a turnaround in the core Yahoo business is underway. In any case, on paper, Yahoo has lost a great deal of value with Alibaba’s decline.

Disclosure: The author holds shares in Yahoo