Alibaba Could Face Tax Hit If It Buys Back Yahoo's Stake
December 02 2015 - 12:49AM
Dow Jones News
By Gillian Wong
BEIJING -- Alibaba Group Holding Ltd. could face a tax hit if it
decides to pursue buying back Yahoo Inc.'s 15% stake in the Chinese
e-commerce giant, analysts said.
The Wall Street Journal reported on Tuesday that Yahoo's board
is planning a series of meetings to discuss its core Internet
business and its stake in Alibaba, citing people familiar with
those plans. Yahoo's management has faltered in its efforts to turn
around its core business and it faces investor pressure to take
more dramatic moves, though the people familiar with the plans say
no transaction is assured.
If Yahoo decides to sell its core Internet business, it could
put into motion a deal for the Alibaba stake as well as its 35%
stake in Yahoo Japan. One possible scenario could see a U.S. media
company or private-equity firm team up with a buyer interested in
the Alibaba stake, potentially Alibaba itself.
Such a deal could work like a stock buyback, potentially
offering Alibaba a discount on its own shares, and eliminate the
overhang and uncertainty surrounding Yahoo's holding in the Chinese
Internet giant. Alibaba's shares have been on a roller coaster
since its blockbuster $25 billion initial public offering in
September 2014.
Three years ago, Alibaba bought about half of Yahoo's then-40%
stake in a deal valued at about $7.6 billion with the backing of
China's sovereign-wealth fund China Investment Corp. and a clutch
of private-equity firms.
Alibaba buying the rest of Yahoo's stake would require savvy
deal making to avoid a huge tax bill on Yahoo's gains from the
Alibaba shares. Analysts said with that in mind, the e-commerce
giant may instead continue to focus on fending off competition
domestically and expanding internationally.
"In the near term, I think they have no interest," said Sean
Zhang, an analyst with 86Research Ltd. in Shanghai. "They will
continue to focus on growth, focus on building a more competitive
company, instead of spending a lot on buying a piece of stake."
In its most recent earnings report, Alibaba said it had net cash
of $2.3 billion. Asked about Alibaba's interest in Yahoo's stake,
Executive Vice Chairman Joe Tsai said during an October call with
analysts that Alibaba would or buy back its shares "if it is very
significantly accretive to our shareholders, and that's the
principle we operate on."
If the transaction didn't impose too much debt on its balance
sheet, Alibaba would likely want its shares back, said Brendan
Ahern, chief investment officer at KraneShares, a manager of
China-focused exchange-traded funds that own Alibaba stock.
At its current price level, Alibaba's stock is also relatively
inexpensive and low U.S. interest rates might make it a good time
to take on some debt, Mr. Ahern said. "They're running a real fine
line between a strong desire to bring this back into the fold and
at the same time you'd hate to allow that desire to jeopardize what
is currently a strong balance sheet," he said.
Alibaba's shares, which have been hit by concerns about China's
economic slowdown and rising competition, have recovered in recent
months after strong sales results and are now trading about 24%
above their IPO price last year of $68. Still, they are down about
20% from a year ago.
Alibaba could also be interested in Yahoo's core Internet
business for branding purposes, said Henry Guo of Summit Research
LLC. "It's attractive to Alibaba in terms of expanding its brand
awareness in the U.S. in the long run," Mr. Guo said. "Because
Yahoo's core business is under pressure, and underperforming, I
think Alibaba could get a good bargain on this."
Alibaba could leverage Yahoo's traffic from its portal business,
Yahoo finance, sports, and other websites on which Alibaba could
place more advertising, he added.
Carlos Kirjner, an analyst at Sanford C. Bernstein & Co.,
said he thought Alibaba had no interest in Yahoo's core business,
but "would consider an acquisition of all or part of Yahoo's stake
in Alibaba if it found a financially attractive way to structure
the transaction." Such a transaction could be attractive to Alibaba
if the price took into account the tax burden, or if Yahoo paid the
taxes, for example, Mr. Kirjner said.
Rick Carew contributed to this article.
Write to Gillian Wong at gillian.wong@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
December 02, 2015 00:34 ET (05:34 GMT)
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