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Morgan Stanley Downgrades Yahoo, Needs A Tax Efficient Sale Of Alibaba Stake For Additional Upside

Benzinga's M&A Chatter for Monday July 25, 2016

Verizon Communications Inc. (NYSE: VZ) has entered into a definitive agreement to purchase the core business of Yahoo! Inc. (NASDAQ: YHOO) for $4.83 billion in cash. Morgan Stanley’s Brian Nowak downgraded the rating on Yahoo from Overweight to Equal-weight, while reducing the price target from $46 to $42.

Nowak commented that currently the risk/reward seemed balanced, and further upside to the new Yahoo HoldCo would require a tax efficient sale of Alibaba Group Holding Ltd (NYSE: BABA).

Why Upside Depends On Alibaba

Following the sale of its core business, Yahoo would be viewed solely “as a trading vehicle” for its stake of about 15 percent in Alibaba, Nowak noted. He added that the pre-tax market value of this stake is $31.9 billion, which currently represents a liquidity discount to fair market value of an estimated ~39 percent.

“The challenging part for us is that assessing YHOO’s ability (or timing) to sell its BABA stake in a tax efficient manner is beyond our core area of expertise. The past year's events (a failed forward spin in 2H:15) and uncertain IRS and regulatory environment going forward make this even more unpredictable,” the analyst wrote.

The logical next step for the new Yahoo HoldCo would be to sell Yahoo Japan in an attempt to close the Alibaba liquidity discount, Nowak commented.

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DateFirmActionFromTo
Jul 2016Morgan StanleyDowngradesOverweightEqual-weight
Jul 2016Credit SuisseMaintainsNeutral
Jul 2016Credit SuisseMaintainsNeutral

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