Yahoo Remains 'Focus Pick' For CRT Capital Despite Aabaco Tax Drama

In a recent report, CRT Capital analyst Robert Coolbrith reiterated a Buy rating and $61.00 price target on Yahoo! Inc. YHOO.

The Spinoff

Last Friday, Yahoo filed an initial registration statement for the spinoff of its large stake in China's Alibaba Group Holding Ltd BABA. The SpinCo was named Aabaco Holdings, Inc.

Analysts at CRT Capital found several surprises in the filing. However, they note two things:

1) The language used suggests that it is possible for Yahoo to waive the requirement for a favorable pre-spin IRS private letter ruling (PLR).

2) “The contemplation of a Tax Matters Agreement between YHOO and Aabaco which would indemnify YHOO in the case of a failure to obtain tax-free status” (the analysts believe that “relevant taxes, barring such indemnification, would typically fall upon YHOO as the distributing entity”), which would, in the firm’s view, allow Yahoo to proceed with the transaction even lacking clarity from an IRS PLR.

Ultimately, CRT Capital analysts believe that, leaving the Treasury's apparent jawboning and "lemonade stand" characterization of the ATB aside, the Treasury is “playing a losing hand,” given the firm’s view that both statute and precedent transactions remain on Yahoo’s side.

In fact, the experts expect the the Yahoo-Aabaco story to end at a “successful, tax-free spin followed, in due course, by the buy-in of Aabaco Holdings,” at a slight discount to Navistar International Corp NAV, by Alibaba, in a stock-swap transaction.

Despite the risks implied, the firm maintains its rating and price target based on a sum-of-the-parts analysis.