Yahoo’s Alibaba Spinoff Creates Unparallel Lines
Holding Aabaco is a bet that Alibaba chooses to snap up its shadow sooner rather than later
Yahoo’s proposed Alibaba spinoff will be just a shadow of the real thing. Those hoping the Chinese e-commerce swoops into the situation might be waiting a long time.
Assuming the deal goes through—Yahoo says it doesn’t know yet if regulators will approve the tax treatment—the spinoff company, called Aabaco, will basically consist of the $32 billion worth of Alibaba shares Yahoo owns, plus a unit called Yahoo Small Business, which helps U.S. merchants setup websites. The stake in Alibaba will initially account for over 95% of Aabaco’s total assets, according to Yahoo’s filing.
The deal is an elaborate way to get around the massive capital-gains tax that Yahoo would face if it sold the Alibaba stake outright. Including the small-business unit allows the company to claim the transaction as a tax-free spinoff rather than a sale.
For Alibaba investors, this grand experiment in tax arbitrage could exert some downward pressure by effectively creating an alternate Alibaba shareholding. But this effect is likely to be slight, as Yahoo effectively already acts as an Alibaba tracker stock.
Aabaco will likely trade at a substantial discount to Alibaba, however, since it is in effect a less-direct means of investing in the Chinese e-commerce giant. That is, unless investors are particularly excited by the small-business unit’s prospects, which is unlikely. Yahoo’s initial filing gives no detail on this unit’s financials.
So why own Aabaco? The endgame for investors would be to wait for Alibaba to acquire Aabaco outright. It would be massively expensive to pay cash, but Alibaba could pay in its own shares. Because Aabaco would likely trade at a discount, Alibaba would be doing so at an advantageous ratio, thus picking up a net stake in itself virtually for free. The maneuver would have the effect of a stock buyback, without having to expend cash.
Meanwhile, the worry for Alibaba management has always been that Yahoo could use its substantial stake to put pressure on them over business decisions. Having that stake parked at Aabaco, a closed-end fund with widely dispersed ownership, would greatly reduce this risk.
Holding Aabaco is a bet that Alibaba chooses to snap up its shadow sooner rather than later. In reality, that day could be years away, if it ever comes.