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Yahoo! Inc. (YHOO) to Proceed with Alibaba Group Holding Ltd (BABA) Spinoff: Analysts Weigh In

By Austin Angelo

Yesterday, shares of Yahoo! Inc. (NASDAQ:YHOO) increased by nearly 6 percent. This was after the company announced that it will go ahead with the spinoff of its stake in Alibaba Group Holding Ltd (NYSE: BABA), in spite of the risk that the deal may not be tax free. Two analysts following the company’s stock weighed in.

On September 29, Neil Doshi from Mizuho Securities reduced his price target for Yahoo to $40, from the earlier target of $43. He’s attributed this to the lower valuation of Alibaba’s stock, noting that it has seen a lot of weakness recently because of concerns around the slowing Chinese economy.

Doshi said, “In our opinion, the IRS is maintaining the status quo on this issue, and with no changes to guidance on this matter, we believe that Yahoo should be able to complete this transaction in a tax-free manner.”

On the same date, Robert Peck from SunTrust Robinson Humphrey maintained his Buy rating on Yahoo with a price target of $40. He’s noted that even though there are precedents which make a tax-free outcome possible, there’s a risk that the IRS will put the deal under scrutiny. Also, he believes the investors have priced in the worst case scenario, in which Alibaba’s stake sale will be fully taxed. He also suggests that investors are giving no value to Yahoo’s core business. Peck says, with “the core valued at ~1x EV/EBITDA under a fully-taxed scenario for BABA shares, we think the risk-reward is materially in our favor.”

Peck believes Yahoo has other tax-efficient/favorable monetization options that could possibly enhance value. These options include issuing tracking shares (with a tax-free outcome adding $10 per share in value). Also, he says, on the business side Yahoo can create value by switching search providers. This option, which will be available starting in October, can contribute approximately $500 million in potential EBITDA, and provide around $250 million of savings by reducing headcount.

Based on TipRanks’ data, out of all the 24 analysts who have recently rated Yahoo, 19 have rated it as a Buy and 5 have rated it as a Hold. No analyst has recommended to Sell the stock. Based on price targets set by these analysts over the past three months, the average 12-month price target for Yahoo’s stock is $46.05; a potential upside of 62.95% from current levels.