While Yahoo(YHOO) still persists in its hope that its spinoff of Aabaco Holdings and its Alibaba(BABA) stake will be tax free, one analyst believes that investors have not been properly evaluating the worst case. Bob Peck of SunTrust Robinson Humphrey believes that taxes may be as high as 65% of the Alibaba stake’s value. Why does he believe that?
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)
Interestingly, Peck still has a $40 price target on the stock as he believes that it is most likely that the transaction will be tax free.
Disclosure: The author owns shares of Yahoo.