Wall Street: It's Not Over For Yahoo's Tax-Free Alibaba Spinoff

Shares of Yahoo! Inc. YHOO were trading lower by nearly 2 percent heading into Wednesday's regular trading session after the company announced on Tuesday that the IRS has decided not to grant a private letter ruling regarding the proposed tax-free spin of Alibaba Group Holding Ltd BABA.

Here is a roundup of what some of Wall Street's top analysts are saying.

UBS: Transaction ‘Delayed,' Not ‘Ruled Out'

Eric Sheridan of UBS commented in a note that it is important to point out that the IRS did not conclude that Yahoo's proposed transaction was taxable and effectively deferred any decision until after the proposed transaction would occur.

Sheridan also noted that Yahoo's tax counsel suggested that the IRS letter was not the result of a change in U.S. tax law and that it would not affect its ability to render an opinion that the spinoff satisfies all the necessary requirements for a tax-free treatment under existing laws.

With that said, Sheridan suggested that the news announcement "does not preclude Yahoo from proceeding with the transaction." However, investors should "continue to search for better stock performance" from Alibaba and/or further clarity on the IRS treatment as catalysts before getting aggressive on the stock.

Shares remain Buy rated with an unchanged $51 price target.

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JPMorgan: Valuation Still ‘Remains Attractive'

Doug Anmuth of JPMorgan commented in a note that a lack of ruling creates "increased risk" around the potential tax-free nature of the spinoff. However, the company continues to move forward with the proposed spin-off transaction while its board of directors will review options including proceeding with the spinoff based on the opinion of its counsel.

Anmuth also noted that Yahoo's stock is still "attractively valued," currently trading at negative EV to 2017E EBITDA, assuming 50 percent tax-efficiency. However, recent China macro pressures and Alibaba's stock performance, coupled with a "more conservative" assumption of the proposed tax-free nature of the spin, results in a lower outlook for Yahoo's stock.

Shares remain Overweight rated with a price target lowered to $44 from a previous $51.

Morgan Stanley: Buyers On Weakness

Brian Nowak of Morgan Stanley also commented in a note that Yahoo's legal counsel still believes that the proposed tax-free spin satisfies all of the requirements for regulatory approval. The analyst noted that the counsel's statement is "important" because when a major tax firm like Skadden issues a favorable opinion, it "suggests a high probability" that Yahoo's outcome will be the desired one.

Nowak did however note that Yahoo's announcement has "mixed messages," as investors were hoping for a "clean approval process." Nevertheless, the analyst recommended investors be buyers on the weakness as Yahoo's stock is "already more than discounting" an unsuccessful or fully taxed Alibaba spin.

Shares remain Overweight rated with an unchanged $51 price target.

Sterne Agee: Yahoo Can Proceed As Planned

Robert Coolbrith of Sterne Agee CRT commented in a note that IRS' failure to issue a firm ruling is "highly politicized," and he is "encouraged" by the fact that Yahoo did not receive a negative ruling.

Coolbrith suggested that a negative ruling would have been "ultimately unsupportable" by the tax code and precedent rulings. As such, the analyst continues to believe that Yahoo can "safely proceed" with the proposed tax-free spin.

Coolbrith also noted that Yahoo's stock is reflecting a "worst-case scenario" along with a "conservative" valuation on the core business. As such, downside risk to the stock is "minimal" at current levels, while the risk to reward profile is "highly asymmetrical" given a view that Yahoo has "relevant tax law" and "precedent transactions" on its side.

Shares remain Buy rated with a price target lowered to $52 from a previous $59 to reflect a revised price target on Alibaba's stock to $93 from a previous $110.

Evercore: IRS Letter Not A Surprise

Ken Sena of Evercore ISI commented in a note that back in late May he downgraded shares of Yahoo, noting that Yahoo is "likely to face a higher bar to satisfy tax authorities" and that Tuesday's announcement isn't surprising.

Sena continued that Tuesday's news announcement likely places a "higher bar" for Yahoo to satisfy the relevant tax authorities, or at the very least "lengthen the process" for a proposed spin. Nevertheless, the analyst added that the announcement does not prevent Yahoo from proceeding with a tax-free spin, especially given Skadden's favorable opinion.

Finally, Sena noted that Yahoo has other tax-efficient options, including spinning its core business instead. In addition, downside to Yahoo's stock appears "limited," while the analyst's bullish view on Alibaba (over the long term) implies upside potential to where shares are currently trading.

Shares remain Hold rated with a price target lowered to $38 from a previous $47 based on a new assumption that a spinoff of Alibaba will be taxed at a 35 percent rate.