Verizon Can Say NO to Yahoo

Verizon can still say “NO” to Yahoo. While Yahoo finally agreed to sell its online assets to Verizon, the two parties will still be connected, at least through Yahoo Japan. As Yahoo becomes Altaba, essentially an investment fund, Verizon still has a say in the Yahoo Japan shares that comprise part of the value of Altaba.

Altaba can’t easily sell its Yahoo Japan shares. First, if the Yahoo Japan shares were sold, then there would be high tax bill and Altaba would return less cash to investors.  Secondly, due a joint venture agreement between old Yahoo and Softbank, Altaba can’t freely sell the Yahoo Japan shares without involving Softbank; if Altaba did decide to sell the Yahoo Japan shares, then Softbank would have the right to first buy the shares.

Now a third roadblock, if Altaba wants to sell Yahoo Japan shares, it will need the consent of Verizon.  As stated in stock purchase agreement…

….the Fund may not, without Verizon’s consent, to the extent within Yahoo’s control, and except as may result in a violation by the Fund or any of its directors, officers, or employees of applicable law (including fiduciary duties) sell its shares in Yahoo Japan or consent to an acquisition of Yahoo Japan or all or substantially all of Yahoo Japan’s assets if such action would reasonably be expected to cause the termination of, or give Yahoo Japan the right to terminate, the license agreement between Yahoo Japan and the Company

Trump Saves Yahoo, Not You?

Trump’s intent to slash the corporate tax rate could help many tech companies, especially Yahoo. Like regular people, corporation pay taxes on income and Yahoo has assets, which, if sold are subject to the currently high corporate tax rate. Lowering the corporate tax rate would mean more money for Yahoo and less for the Government.

High corporate tax rates have already caused Yahoo to pay a lot to the Government. Back in September 2014, after Marissa Mayer sold a portion of Alibaba shares, Yahoo paid $3.3 billion in taxes to the Government on a $9.4 billion sale. This left shareholders with only $6.1 billion; that amount would have certainly been more under Trump’s corporate tax rate.

Unlocking

Trapped inside Yahoo is not only Alibaba shares, but shares of Yahoo Japan. Getting the Alibaba and Yahoo Japan shares out of Yahoo, without incurring a large tax bill, has vexed many managers. Not only does Yahoo pay taxes on any gains, but the gains are taxed again when distributed as dividends to shareholders. This is why activist investor,  Starboard Value, looked for tax-free ways to get the assets out of Yahoo.

One method tried was not to sell the Alibaba and Yahoo Japan shares, but to distribute the shares to Yahoo shareholders in a tax-free spin-off. When that didn’t work, Starboard Value proposed the sale of Yahoo’s online business with the Alibaba and Yahoo Japan still trapped inside Yahoo. With the online business gone, the true value of the Alibaba and Yahoo Japan shares should be realized.

In July 2016, Yahoo proposed selling the online business to Verizon for $4.8 billion.  If Verizon could wait, then Yahoo could save money. As with the Alibaba stock sale in 2014, Yahoo will owe taxes on the sale of the online business. Yahoo is selling the online business for $4.8 billion and the online business has a value of $4.1 billion to Yahoo.  Thus the gain on ‘this’ sale is $700 million. Yahoo estimated the tax bill on the sale to be $290 million; that amount would be $140 million under Trump’s lower tax rate.

ALTernative AlibABA

After the sale, Yahoo will be replaced by Altbaba. The new name could be a play on “ALTernative AlibABA” because the newly named company will hold the remaining Alibaba shares. Altaba will also have the Yahoo Japan shares, patents, and cash. Over time, the cash will be distributed to Altaba shareholders as either dividends or tax-efficient, stock repurchases.

Altaba’s stated goal is tracking the “combined investment return of the Alibaba Shares and the Yahoo Japan Shares”. Tracking is not assured since Altaba will include other things such as the patents and tax liabilities. Yahoo estimates it owes the government $12 billion in taxes if the Alibaba stock was to be sold. So the ultimate value of the Altaba is the market value of Alibaba shares ($31 billion) and Yahoo Japan shares ($3 billion) less the tax liabilities ($12 billion). Based upon numbers released in a September 2016 proxy, that amount would be $22 billion.

Altaba shareholders could benefit from Trump’s lower corporate rate. A lower corporate rate would cut in half the estimated tax liability on the Alibaba shares. Instead of tax liabilities of $12 billion, the new Altbaba would only owe taxes of about $6 billion. The lower tax liability would increase Altaba’s value from $22 from $28 billion.

Conclusion

Trump proposed corporate tax rates may not change the timing and structure of the Yahoo’s proposed transactions. But for Yahoo shareholders the lower tax rate may impact value of their investment.

Disclaimer: Post intended only for information and not for investment purposes.