Yahoo! Inc. has proposed to spin off its stake in Alibaba and rename it Aabaco Holdings. However, the Internet company hopes that regulators in the United States would approve a tax deal first before conducting this business operation.
According to Aaron Back of the Wall Street Journal, Aabaco, the spinoff company, would consist of the $32 billion worth of Alibaba shares Yahoo owns. Based on Yahoo's filing, 95 percent of Aabaco's total assets would be formed from the stake in Alibaba.
"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," Back wrote. "Including the small-business unit allows the company to claim the transaction as a tax-free spinoff rather than a sale."
Back reported that for those investing in Alibaba, the "grand experiment in tax arbitrage" could result in "downward pressure by effectively creating an alternate Alibaba shareholding." The Wall Street Journal noted that Yahoo's initial filing did not provide any details on the financials of Aabaco.
"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," Back wrote. "That is, unless investors are particularly excited by the small-business unit's prospects, which is unlikely."
The Wall Street Journal looked at reasons why investors would want to own shares in Aabaco.
"The endgame for investors would be to wait for Alibaba to acquire Aabaco outright," Back wrote. "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."
Back added that "the maneuver would have the effect of a stock buyback, without having to expend cash." However, he noted that "there's little urgency" for Alibaba to conduct such a business move.
"It just raised capital, so turning around and extinguishing shares seems unlikely," Back wrote.
According to Jessica Guynn of USA Today, Yahoo originally announced the spinoff in January. It expects the move to take place in the fourth quarter barring any regulation red-tape.
"Yahoo warned it might call off the spin-off if it can't get written assurances from tax authorities that the transaction will be tax-free for shareholders," Guynn wrote. "Yahoo did not announce who would lead Aabaco."
Yahoo indicated to USA Today that once the spinoff takes place, "Aabaco Holdings will own about 384 million shares of Alibaba Group, representing an ownership interest of approximately 15 percent in Alibaba Group."