Yahoo Files with SEC to Spin Off $32 Billion Alibaba Stake

Search provider Yahoo (YHOO) last Friday filed documents with the SEC to spin off by year’s end its $32 billion, 15 percent stake in Chinese e-commerce company Alibaba.

Yahoo cautioned in the Form N-2 filing that it could cancel the spin-off, which initially was announced in January, should federal tax regulators rule the transaction is not tax-free for shareholders. While authorities are reviewing the tax implications of the spin-off, Yahoo has presented the plan to shareholders as unencumbered by taxes.

The new entity will be called Aabaco Holdings and will command some 384 million shares in Alibaba, which at current prices is worth about $32 billion. In the filing, Yahoo didn’t name an Aabaco executive team or board of directors. Aabaco will operate as an independent, publicly traded firm, Yahoo said.

The Aabaco spin-off is intended to transfer the value of Yahoo’s Alibaba stake to its shareholders without the burden of $10 billion in capital gains taxes that would occur if Yahoo sold the stock and paid out the proceeds, according to reports.

To comply with federal law on tax-free spin-offs, Yahoo has included in the deal a newly-formed entity called Yahoo Small Business–the company’s small business services unit–to satisfy the government’s requirement that an operating business be part of the transaction. Aabaco will own 100 percent of Yahoo Small Business.

Yahoo also said in the filing that Aabaco shareholders also could be subject to a 10 percent tax from a new rule imposed by Chinese regulators last February.

Should U.S. tax authorities rule after the Aabaco transaction closes that the spin-off is a taxable action, shareholders likely will have to shoulder the burden, Yahoo said.

Yahoo said it expects the deal will close in the fourth quarter.

Last November, Yahoo’s market value stands at about $47 billion, with its stake in Alibaba worth some $44 million, not exactly a ringing endorsement of the company’s core businesses. Right now, Yahoo’s market capitalization stands at $37.2 billion, only $5 billion more than the value of its Alibaba stake.