Yahoo Sings- Alibaba And The $40 Billion Spin

Ever since Alibaba’s (BABA) wildly successful IPO, investors have been wondering what Yahoo (YHOO) had in mind for its roughly $40 billion minority stake in the company. A sale would generate a lot of cash for the company, but also bring a monstrous $16 billion tax bill with it such as when the company unloaded shares during the IPO. A sale would also raise concerns over what CEO Marissa Mayer would do with that much cash. Supposedly insiders believed that Ms. Mayer’s preference was to keep the cash in house for some big initiatives. Buyback the company? Pricey M&A? Investors, including the very active Starboard, were pushing for a more tax efficient solution such as a spinoff. The fund even sent the Board a letter last September pushing for an Alibaba spinoff along with the separation of its profitable Yahoo Japan. Another possible solution was a ‘cash rich split off’ which would have Alibaba sending back an operating business and cash in exchange for the shares.

Chalk another victory up to the activists as during its Q4 conference call, the company announced that it would in fact pursue a spinoff of its Alibaba stake. The spin, assuming all approvals are obtained, is expected to occur sometime in Q4 this year after the expiration of the one year lock due to the IPO. The spinco, which will be a registered investment company, will have no debt and also hold a ‘legacy, ancillary Yahoo business’ which is likely due to legal/tax reasons. The business, which wasn’t identified, will generate ~$50m in EBITDA. According to CFO Ken Goldman, this will be a ‘unique spin-off transaction. We are not aware of any present — of an operating company spinning off a registered investment company.’ Bold move.

Ms. Mayer made a point to talk up the company’s shareholder friendly activities:

Throughout my tenure with the company, we have worked tirelessly on a tax-efficient alternative that would maximize the value of our Alibaba investment for our shareholders. A tax-free spin off accomplishes this and delivers value directly and exclusively to our shareholders…Through share repurchases to date, we have returned approximately $9.7 billion of proceeds from Alibaba. Post-spin, using the closing price for Alibaba as of January 26, we will have returned nearly $50 billion dollars of value to our shareholders. This level of capital return is historic, especially for a company of our size. The plan announced today vividly demonstrates our commitment to being good stewards of capital and increasing shareholder value.

Shares popped on the news, but it remains to be seen if Starboard will go away. In addition to the spinoff of Yahoo Japan, the firm has pushed for plenty of other changes at the company such as cost cutting and a merger with AOL. Either way, the company will have to figure out a path forward for its much smaller core business without its most valuable chip in play anymore. Maybe it will be in search or in its faster growing mobile, native ads, video and social segments. The spin will bring closure to one challenging situation, but Ms. Mayer still has a lot more work to do to turn things around, especially if she feels like she is losing shareholder support.

Disclosure: Author holds no position in any stock mentioned.