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Verizon Deal Delay: What Does It Mean For Yahoo, Alibaba Investors?

Verizon Deal Delay: What Does It Mean For Yahoo, Alibaba Investors?

With several deals hitting the roadblock before consummation, an announcement from Yahoo! Inc. (NASDAQ: YHOO) regarding a delay in the closure of an impending deal should worry investors to no end.

Deal On, But To Be Delayed

Yahoo said in its fourth-quarter earnings release that the M&A transaction providing for it to be bought by Verizon Communications Inc. (NYSE: VZ) will now close in the second quarter of 2017 instead of the first-quarter timeline it had provided earlier.

Data Breach Behind The Delay

Regulatory scrutiny on data breach has supposedly caused the delay in the consummation of the deal. In September 2016, Yahoo said personal information of over 500 million of its users was stolen in 2014. The revelation was followed up with a more startling one in December, when it said it had suffered from another breach in 2013, impacting more than 1 million of its accounts. Following the twin revelations, the markets were awash with speculation that the Verizon-Yahoo deal will be renegotiated.

For the uninitiated, Verizon stitched together a deal to buy Yahoo's core business for $4.83 billion in July 2016, although the latter's investment in Alibaba Group Holding Ltd (NYSE: BABA) and Yahoo Japan and some non-core patents and Yahoo's cash were excluded from the merger. The 15 percent stake in Alibaba and the 35.5 percent interest in Yahoo Japan were to remain with the remaining company called Altbaba.

What The Delay Means For Yahoo Investors?

Yahoo shares have risen over 16 percent since the announcement of the deal. Analysts feel the stock is still appealing despite the run up. According to a Barron's report, the net asset value of Yahoo, including the RemainCo, is around $60 per share, with much of the value attributable to the stakes in Alibaba and Yahoo Japan.

Any liquidation of the stakes in Alibaba and Yahoo Japan will invite a federal income tax rate of 35 percent. A Fortune report estimates the current worth of Yahoo's stake in these two companies at $36.7 billion, deducting the $4.8 billion deal value of Yahoo's core assets from the market capitalization of Yahoo. With most of the $36.7 billion assumed as profit, a 35 percent tax on that would mean a tax outgo of $13 billion. Therefore, Alibaba is unlikely to pursue a buyback of its shares.

The Fortune quoted Gabelli & Co. analyst Brett Harriss in suggesting that Yahoo shareholders could realize about $51 a share in the eventuality of liquidation. The analyst does not see much downside for the Yahoo stock from current levels.

For the liquidation to materialize, the core asset sales should go through. Therefore, Yahoo investors would be fidgety over the delay in the deal. Even if Verizon negotiates a reduction in the deal price in the wake of the data breach controversy, investors could still be OK with the it.

What The Delay Means For Alibaba Investors?

Since analysts see limited chances of Alibaba buying back the 15 percent stake Yahoo currently holds in it due to the heavy tax burden, the delay may not mean much for Alibaba shareholders. The Fortune report also said Alibaba cannot retire the shares without being caught in the tax net. if it repurchases these. Thus, the buyback will not vest the advantages of a shrinkage in the outstanding shares.

The focus now shifts to Verizon and its thinking on the developments. President Donald Trump could also have a say on how things unfold at Yahoo, given his promise of corporate tax reform.


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