Bob Peck: Yahoo Still Pricing In Worst-Case Scenario

• The share price of Yahoo! Inc. YHOO has declined 46.11 percent, year to date, from the high of $51.22, reached on December 30, 2014.
• Robert S. Peck of SunTrust Robinson Humphrey has maintained a Buy rating and price target of $40 on the company.
• The company announced on September 28 that its Board had authorized Yahoo to continue with its plan to spin-off Aabaco.

According to the SunTrust report, the company’s Board has “waived the favorable IRS private letter ruling (PLR) requirement for the spin-off, and the company is proceeding with the proposed transaction.”

Although the stock rallied after market close, following this announcement, Peck believes that the PLR request being denied by the IRS and the accelerated departure of executives from the company would worsen investor sentiment.

Regarding the Aabaco spin-off, Peck reported that Yahoo’s Board “retains the right to modify/cancel the transaction at any time,” and that the main conditions for completing the spin-off include obtaining the tax counsel’s legal opinion, declaration from the SEC that the registration statement was effective and the Board granting its final approval.

The company expects to close the transaction in 4Q15. Although the IRS is working on modifying the rules for taxing spin-offs, Peck believes that Yahoo would be able to complete its spin-off before the new rules are enforced.

“While precedents could support a tax-free treatment, the possibility of an IRS audit could create uncertainty on the final tax bill,” Peck added.

While investors appear to be pricing in the worst case scenario into the stock, Peck believes that the risk-reward is favorable at present.