Cantor Shines Light on Yahoo! Inc. (YHOO) and Alibaba Group Holding Ltd (BABA) Following IRS Rejection of Private Letter Ruling

By Carly Forster

Internet giant Yahoo! Inc. YHOO announced yesterday that the IRS will not grant the private letter ruling the company requested in regards to the proposed tax-free spin-off of its remaining stake in Alibaba Group Holding Ltd BABA.

Yahoo has been planning to spin off its shares of Chinese e-commerce company Alibaba since January and expects the move to be completed by the fourth quarter of 2015. Investors were spooked away from Yahoo in May after speculation that the IRS was considering taxing company spinoffs, which are usually not taxed. Yahoo CEO Marissa Mayer sent a letter to shareholders in June trying to assure them that the spinoff will "[maximize] value and tax-efficiency exclusively for Yahoo's shareholders."

While investors are viewing Yahoo's failure to obtain private letter ruling as a negative, the IRS specified that it had not concluded whether the proposed spin off will be taxed in the first place, thus not ruling adversely against the request either.

Cantor Fitzgerald analyst Youssef Squali weighed in on Yahoo following the news on September 9, maintaining a Buy rating on the stock but cutting his price target from $56 to $45. The analyst views the news "as a black eye for the Yahoo team considering that it is the architect of this much-anticipated transaction."

Furthermore, "Alibaba's disclosure at an investor conference yesterday that China macro issues are having a negative effect on consumer spending adds more uncertainty around BABA's valuation (also see today's BABA note), and in our view creates more urgency for Yahoo to complete this transaction, which we believe until now has been the reason to buy YHOO stock in the first place."

Squali also maintained a Buy rating on Alibaba on September 9 and likewise, slashed his price target from $95 to $88. The company held an investor conference which led Squali to believe "that GMV growth is seeing negative impact on consumer spending as a result of ongoing macro weakness in China."

He added, "With little visibility into the magnitude or length of this weakness, we're lowering our GMV growth expectations for Alibaba for the remainder of FY:16 and beyond. We're maintaining a BUY rating however, given our view that the company remains one of the prime beneficiaries of the secular growth trend in Chinese ecommerce."

On average, Youssef Squali has an overall success rate of 56% recommending stocks and a +14.4% average return per recommendation when measured over a one-year horizon and no benchmark.