Yahoo’s Troubled Aabaco Holdings Spinoff Of Alibaba Stake May Face New Delay

It’s been a rough road for Yahoo(YHOO)’s planned spinoff of its Alibaba(BABA) stake into Aabaco Holdings. After months of sniping with the IRS, culminating with the agency’s refusal to issue a private letter ruling, the company decided to move ahead anyway without the ruling and rely instead on the opinion of counsel.  The company backed a Q4 date for the transaction’s completion. Now, on yesterday’s earnings call, the company warned that the transaction may be delayed until Q1.

Marissa Mayer:

Before I hand it over to Ken to you discuss our financial results in greater depth, I wanted to take a moment to comment on the planned spinoff of Aabaco Holdings. We continue to make good progress and strive to complete the spin in Q4. We do want to note that due to the time needed to satisfy certain conditions, including completing the required SEC process, the final approval of both the Yahoo and Aabaco Boards, compliance with the notice requirements under the convertible note indenture, and taking into consideration holiday market closures at the end of the quarter, the transaction may ultimately conclude in January.

I also want to take this opportunity to thank everyone who’s been working tirelessly on the spin. It’s an important moment for the Company, for our investors, and a significant event in Yahoo’s history.

Ken Goldman:

Before diving further into the financial details for the quarter, let me make a couple comments on the Aabaco spinoff transaction. After carefully considering the Company’s options and feedback we received from our shareholders, our Board authorized the Company to continue to pursue the planned spinoff without a private letter ruling on the basis of a receipt of a favorable tax opinion from counsel.

As Marissa noted, there are a number of factors to consider as we drive the transaction to conclusion, including regulatory processes, respective Board approvals, notice requirements and holiday market closures. We remain focused on executing the transaction as soon as possible and look forward to updating you on the complete spinoff as well as our go-forward plan for core Yahoo on our Q4 earnings call.

I am focusing on the following for Q4. One, working diligently to complete the spinoff transaction. Two, build a 2016 financial and operational plan that is realistic and executable, achieving our goals for revenue, earnings, EBITDA and free cash flow. Three, develop a plan and strategy to communicate to investors our core Company direction post spin which includes how best to optimize our investment in Yahoo Japan. And, finally, finish 2015 financially as strong as possible to set the stage for 2016.

The call’s Q & A also featured an … umm … illuminating discussion of taxes by CFO Ken Goldman

Anthony DiClemente, Nomura Securities – Analyst [4]


Okay. Thanks, Marissa. And then just one for Ken. Ken, this is an Aabaco related question. Some investors are wondering where does the post spinoff tax liability reside? Our understanding is that if the spinoff were to incur a tax liability after the transaction, Aabaco would then pay back Yahoo for any taxes that Yahoo would have to pay such that Aabaco would be liable and not core Yahoo.

So can you confirm that for us or just weigh in on how that all works? Thanks.


Ken Goldman, Yahoo! Inc. – CFO [5]


I think that’s primarily related — you can see it all in the N2. Very clearly it says, first of all, it’s all hypothetical, hopefully, relative to taxes. So, that’s first of all. But also in terms of who pays the taxes, the indemnifications they’re on, that’s all really quite laid out in the N2. And I’d prefer to not just say it right now.

And a bit more discussion of taxes and what still needs to be completed


Mark May, Citigroup – Analyst [11]


Okay. Thanks. Thanks for having me. A question on Aabaco. Given that the Board has decided to proceed with the spinoff without written confirmation from the IRS, what can you say to investors to make them comfortable that the IRS will not come back and challenge the structure of this deal in the future?

And a second somewhat related question in terms of pushing out the potential timing of the deal until maybe January, it sounded like a number of the things that you listed there are more around when, not if, related, it’s more around timing. But can you just give us a sense for some of the things that you still need to get done to get the deal to happen? What, if any, risk do you see of not being able to get Board approval or SEC, et cetera? Thanks.


Marissa Mayer, Yahoo! Inc. – CEO [12]


Sure. I’ll start and then Ken can fill in. In terms of the IRS actions, we’d prefer obviously not to speak with them. That said, we do feel that we have a very good legal opinion that’s very strong around the fact that this transaction would be tax sufficient under current law.

And in terms of the when, not if, yes, I think that’s correct. When you look at overall, some of the things that may cause us to ultimately conclude in January we are making great progress on getting these completed. Some of these do, for example, like the notice on the convertible bond indenture, some of these do have fixed time lines. And we also want to make sure we pick an ideal time to do the spinoff. We would prefer to avoid some of the holiday market closures towards the end of the quarter just in terms of introducing the new trading entity. But we do feel really confident overall about the transaction.


Ken Goldman, Yahoo! Inc. – CFO [13]


Yes, I think that’s true. I would just say this — we have made a tremendous amount of progress. There is a lot of work that has been done and accomplished here. Believe it or not, we can see the goal line, so we are really very confident relative to that.

We have a few things to do as we enumerated. We’re following through on all of those. We tend not to want to speak for the IRS, so we’re not going to do that. But we work very closely with our tax and legal advisors and so that’s allowed us to make the statements that we have made. But I can assure you, we have all hands on deck whether it’s the management team, the Board and so forth, to achieve this and achieve a positive outcome in the time frame that we established for this spinoff.


At this point it looks like the delay, if any, will not be long. But for Yahoo’s embattled management team, even a short delay may be far too long.

Disclosure: The author owns shares of Yahoo