TCI’s presentation acknowledges that Altaba’s management is doing the right things by buying back shares and pursuing asset sales, but the pace isn’t quick enough for TCI. Tax reform was huuuuge for shareholders, but TCI seems worried that those benefits might not stick around too long so it’s urging the company to act with more urgency. A discount still exists due to the remaining tax burden and other concerns such as liquidity. In order to shed this discount, TCI wants the company to distribute 80% of its BABA shares to shareholders (using the other 20% to pay for taxes and the like) and for it to sell or distribute its Yahoo! Japan stake. The interesting wrinkle is that TCI argues that this approach should be eligible for a ‘high blockage discount’ on taxes which would reduce the effective tax rate below the corporate rate by a further several hundred basis points.
Barron’s notes that the ‘blockage discount’ has never been used by a corporation in this way before and is typically only employed by estates dealing with large shares in corporations. While it’s a novel reading of the law that might work, the publication also notes it will likely have to fight the IRS in order to do so:
“The blockage discount is well worth consideration by Altaba,” says New York tax expert Robert Willens. “It’s a viable theory.” Willens adds, however, that the Internal Revenue Service “is sure to challenge” Altaba if it tries to use the discount to cut its tax bill…Willens says that an IRS challenge and likely appeal of any court decision could drag on for years, and that Altaba likely would have to reserve for an adverse ruling.
How ironic. The circle of (corporate) life continues on. Yahoo was urged by hedge funds to pursue a doomed tax risk filled spinoff strategy which ultimately led to the creation of Altaba. Now another hedge fund is pushing Altaba to pursue a risky tax strategy related to its Alibaba shares. One might say it’s cursed…except Alibaba just seems to go up and up and up rewarding Altaba shareholders as well.
For it’s part, management responded by saying that ‘taking actions to narrow our share price discount to adjusted net asset value’ is their ‘top priority’. Furthermore, they reiterated that they often engage in ‘open and direct communication with our shareholders on options to create shareholder value’ and ‘are confident that will continue.’
I am sure they are – what else are they doing? On one hand, it’s hard to believe that there are even employees at the company because there is no real business. I imagine that every meeting, every agenda and every water cooler discussion revolves around how to narrow the discount to NAV. Aside from compliance work, what else is there to do? Tax reform was probably the most exciting thing that could ever happen to them. Heck, even when there was an operating business, I wouldn’t be surprised if Marissa Meyer spent over 50% of her time trying to monetize these assets.
Except…if it were easy, it would have been done already. That’s the rub. There is no real motivation for Alibaba to buy these shares back. Yahoo Japan would need consent from Softbank in order to do anything. In some ways, the company is just stuck. Barron’s quotes a shareholder, Jeff Lignelli, saying that ‘there is “deal fatigue” with Altaba because investors have been waiting years for a resolution’. This ‘discount’ has been there for years and it seems someone new gets involved trying to solve the problem every few years. Maybe liquidation is the answer and TCI going ‘active’ will add some fuel to the fire since the fund does own ~10% of the company’s shares. Sadly, there is really only so much that management can actually do.
Disclosure: Author holds no position in any stock mentioned.
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