YHOO - Yahoo Inc.

[thepupil]

ni-co, you were creating a 10% position in the stub? 50 % long YHOO, 40% short BABA? That is a bit aggressive.

 

 

https://finance.yahoo.com/news/starboard-delivers-letter-yahoos-ceo-133500189.html

 

New letter out from Starboard. Some key points:

 

- argues 7% is the "correct" SpinCo discount on analysis of 20 yrs of similar structures and holdco discounts

- argues stub is worth about $22 / share, 27% upside to the whole company, 100% to the stub

- agrees with the deterioration in core business

- points out some other areas of juice to be squeezed from this company (real estate, IP etc.)

 

I think they are stretching a little bit, but most points are valid.

[ni-co]

ni-co, you were creating a 10% position in the stub? 50 % long YHOO, 40% short BABA? That is a bit aggressive.

 

This is exactly my problem. It was too much leverage – I wouldn't have any problem with a 10% position otherwise. I run a very concentrated portfolio. High cash position but normally only 4-5 core positions. My position sizing depends on the risk/reward of a position but I'm usually sizing positions 10% at the beginning. I'm fine with my portfolio declining 25% or more in any given year when, say, my 5 10% positions decline by 50%. But this is only possible if I'm not a forced seller as long as I think that the value is still there.

 

I misjudged the risk here. For example if BABA was doubling in price and the YHOO stub declined for a few weeks, I'd become a forced seller. This would even be a problem with a 5% position (which I'd put on with high risk/high reward positions like LEAPs) if e.g. BABA exploded and the market crashed simultaneously. This is not a position I want to be in. So thanks to Schwab711 for reminding me of the LTCM debacle, this got me thinking about more extreme scenarios and I should have done that before putting the position on.

[lu_hawk]

One thing that has to be kept in mind when thinking about the SpinCo and especially when comparing it to Malone's transaction:

 

YHOO's tax basis in its BABA shares is near zero (the whole reason there is the tax problem).  When those BABA shares get transferred to SpinCo, SpinCo's basis will be inherited from YHOO's basis, I.e., SpinCo's tax basis will be near zero.

 

Those BABA shares will be "stuck" inside SpinCo the same way they are stuck inside YHOO.  Any type of value creating transaction that I can think of will trigger the tax liability.  For example, BABA could buy SpinCo, but if it wants to retire the BABA shares held by SpinCo then it would have to take those shares out of SpinCo, and to do so would trigger the tax. 

 

As a result, if BABA were to purchase SpinCo with an eye towards retiring the shares, the purchase price would include a discount that would reflect the tax liability.  Meaning thst YHOO holders are essentially paying the tax through the reduced purchase price.

 

I don't think this issue is something that has been appreciated by YHOO holders that I know or in the press.  Doing the spin-off really doesn't accomplish anything other than give YHOO holders a separate ticker to look at. I don't think it does anything in regards to the tax liability, because the tax basis in the BABA shares, wherever they are held, is carried over from the prior holder and is always going to be near zero.  And in order to "do something" with those shares, the tax will have to be paid. 

 

Before comparing this to Malone's transaction you need to look at the tax basis in TripAdvisor stock, which I believe is about $60/sh.  I.e., Malone did not have a large built-in gain on those shares. 

 

I can't think of any way around this problem; I don't think anything valuable can be done with those BABA shares without incurring the tax liability. Which means that the valuation of SpinCo would have to be reduced to account for it.

[merkhet]

Why would BABA have to retire the shares? What would be the point?

[thepupil]

yep, as far as i can tell this will be a RIC. If it is, then it's a pass through vehicle and taxes will be paid at the holder level. SpinCo may be able to just say "we will liquidate in 2 years so we suggest our shareholder base be of the non-taxable sort by then" and the discount would close as the IRA's 401ks, pensions, endowments, and foundations and all the mutual and hedge funds that don't care about taxes would swap BABA for SpinCo or go long and short (though shorting that much would be problematic).

 

The people that move big money are not tax sensitive. Look at mutual fund turnover. Look at who comprises hedge funds' LP base. Look at how the vast majority of ordinary americans invest (through 401k's).

 

http://www.investopedia.com/terms/r/ric.asp

 

If the discount is 20% (the largest i think is rational because that is the max LT cap gains at the moment) so it would be a full tax discount, then the SpinCo discount lost per Yahoo share will be: 0.2*0.39*(BABA Price).

 

At a price of $100, that would be $7.8 and you would be paying about $16 per share for RemainCo, which has a full value of about $20. You'd probably lose a little money because RemainCo might trade for an even lower multiple of NAV, but it wouldn't be catastrophic either.

 

If BABA really skyrockets, and you layer on a fat SpinCo discount, then you can start to get impaired by the trade.

 

40 act fund, and the pass thru taxation that comes with it,  helps this issue significantly.

 

Also the lower BABA goes, the better trade this becomes since the stub's discount becomes a bigger % of the long leg and the SpinCo discount will be a lower % of overall value. The move from $100-$80 helped; just something to be aware that this is a bearish biased trade (with all the risks and reward that come with that).

 

EDIT: the spin-off accomplishes a lot: it gets it out of Yahoo's hands where they may be tempted to use it to buy dumb stuff, it creates a much cleaner story, it allows Yahoo stock to move in line with its business (Marissa's successor and team won't keep getting paid for something mostly out of their control).

 

You can argue SpinCo isn't perfect, but it's  A LOT cleaner than a holding company that owns a dying business, a minority investment in a growth stock that comprises 80% of its value, a bunch of cash, etc. SpinCo is the first step of the clean up. Japan is next and cash (which I think management will keep more than activists want) is after that. The core business should be sold too, but let's not hold our breath waiting for that. 

[lu_hawk]

yep, as far as i can tell this will be a RIC. If it is, then it's a pass through vehicle and taxes will be paid at the holder level. SpinCo may be able to just say "we will liquidate in 2 years so we suggest our shareholder base be of the non-taxable sort by then" and the discount would close as the IRA's 401ks, pensions, endowments, and foundations and all the mutual and hedge funds that don't care about taxes would swap BABA for SpinCo or go long and short (though shorting that much would be problematic).

 

The people that move big money are not tax sensitive. Look at mutual fund turnover. Look at who comprises hedge funds' LP base. Look at how the vast majority of ordinary americans invest (through 401k's).

 

http://www.investopedia.com/terms/r/ric.asp

 

If the discount is 20% (the largest i think is rational because that is the max LT cap gains at the moment) so it would be a full tax discount, then the SpinCo discount lost per Yahoo share will be: 0.2*0.39*(BABA Price).

 

At a price of $100, that would be $7.8 and you would be paying about $16 per share for RemainCo, which has a full value of about $20. You'd probably lose a little money because RemainCo might trade for an even lower multiple of NAV, but it wouldn't be catastrophic either.

 

If BABA really skyrockets, and you layer on a fat SpinCo discount, then you can start to get impaired by the trade.

 

40 act fund, and the pass thru taxation that comes with it,  helps this issue significantly.

 

Also the lower BABA goes, the better trade this becomes since the stub's discount becomes a bigger % of the long leg and the SpinCo discount will be a lower % of overall value. The move from $100-$80 helped; just something to be aware that this is a bearish biased trade (with all the risks and reward that come with that).

 

EDIT: the spin-off accomplishes a lot: it gets it out of Yahoo's hands where they may be tempted to use it to buy dumb stuff, it creates a much cleaner story, it allows Yahoo stock to move in line with its business (Marissa's successor and team won't keep getting paid for something mostly out of their control).

 

You can argue SpinCo isn't perfect, but it's  A LOT cleaner than a holding company that owns a dying business, a minority investment in a growth stock that comprises 80% of its value, a bunch of cash, etc. SpinCo is the first step of the clean up. Japan is next and cash (which I think management will keep more than activists want) is after that. The core business should be sold too, but let's not hold our breath waiting for that.

 

I'm not commenting on what SpinCo accomplishes in any other sense, I am saying that it doesn't accomplish anything from a tax perspective.  It just shuffles the tax liability around to different corporate entities.  It does not reduce or defer any tax in any way.  Right now, YHOO shareholders own a certain # of BABA shares with an approximately zero tax basis.  After the Spin, YHOO shareholders will own the same amount of BABA shares with the same tax basis.  There will just be a different ticker symbol to look at.

 

And don't forget, YHOO may be tempted to buy dumb stuff, but to use the BABA shares as currency would also be an event that triggers the tax. 

[thepupil]

it does accomplish a lot from a tax perspective because it (once again, assuming all goes well), acheives pass through taxation as a 40 act fund/registered investment company.

 

Let's pretend I had a $40B IRA and bought all of Yahoo and made Yahoo sell BABA and distribute to me the cash in the form of a dividend.

 

If Yahoo sold its BABA shares it would recieve (per share) :  (0.39)*BABA Price - Corporate tax rate on gain on sale. At $82 BABA, Yahoo shareholders would get $32 / share in gross proceeds minus tax AT THE CORPORATE RATE OF 40% so the dividend would be $19 per share.

 

If my $40B IRA buys all of SpinCo, SpinCo sells BABA and passes through taxation to my IRA, which pays a capital gains tax of....wait for it....zero percent!

 

SpinCo is important from a conglomerate discount/capital allocation concern perspective (it has merit outside of tax consequences), but it accomplishes a lot in terms of taxation because it wil be a 40 act fund and a RIC.

 

Now there is such thing as taxable RIC, and I'm not a tax expert. Maybe the IRS takes issue with the structure of the spinoff and the implications. But that's not what you are saying. You are saying the spinoff does not help from a tax perspective and that a big tax discount is warranted. I disagree. It removes the prospect of double taxation (allowing non-taxable investors to not care) and lowers the maximum rate (corporate versus individual capital gains rate)

[lu_hawk]

I'm not sure if being a RIC allows SpinCo to avoid paying tax (if that is what you are saying, you might not be saying that).

 

Look to Sec 1374 and Reg 1.337-(d)(7) which deals with REIT and RIC conversions.  (People may have more experience in looking at REIT conversions which have been somewhat common over the last few years; the same rules apply to both REITs and RICs) (and 1374 seems to only deal with S corporations, but then 1.337(d)(7) states that 1374 will also apply to a C corp that becomes a RIC).

 

The built-in gain on the BABA shares will be preserved (by preserving the near-zero basis).  If those shares are disposed of (or if there is any other type of recognition event) during the first 10 years following the conversion (the "recognition period") then the tax will have to be paid, regardless of the fact that SpinCo is a RIC (this is the same as for a REIT; the REIT would have to pay tax on the disposal of any asset that had a built-in gain at the time of REIT conversion even though REITs generally do not pay taxes at the corporate level).  Moreover, 1374(b)(1) dictates that the tax rate on this gain would be the top corporate rate (currently 35%).

 

This treatment keeps with the general principle that you can defer taxation of gains in certain situations, but you very rarely can eliminate the taxation--the tax liability stays with you by keeping a carried-over basis.

 

In short, I don't think that being a RIC helps SpinCo in avoiding paying the tax on the BABA shares (at least not for the first 10 years).  Any type of value-creating transaction would also be a recognition event which would trigger the tax.  The shares can simply be held inside SpinCo and that will not trigger any tax, but the shares could also continue to be held inside YHOO without triggering any tax either.

 

As for shareholder-level tax effects, I'm not familiar with those and agree that it's not much of an issue because the marginal buyer is not sensitive to shareholder-level taxes.

 

 

 

[thepupil]

On that point, you are correct. I am wrong. Thank you.

 

It does allow SpinCo to forever defer tax. It does not allow for pass through taxation. I should have thought about the REIT conversion angle.

 

I still don't think the SpinCo discount will be large but I retract all previous stupidity in my previous posts  about pass through taxation as that was too good to be true and you have changed my mind.

 

 

 

 

[merkhet]

Does the following situation avoid the tax?

 

Putting $0 cost basis shares into SpinCo. BABA buys SpinCo. BABA then does an asset swap w/ SpinCo and releases it into the wild.

 

That could be a possibility.

[lu_hawk]

I'm not totally sure what you are saying here.  Asset swap with SpinCo meaning that BABA transfers certain assets into SpinCo and in return BABA receives the zero-basis shares from SpinCo? Not sure if this would change anything.  Exchanging the shares for $X worth of assets is treated the same as selling the shares for $X worth of cash.

 

Obviously I can't say that there is absolutely no way to do something valuable with the shares without paying tax because that would involve proving a negative, but I think it is very unlikely that the BABA shares can be accessed without triggering the tax.  SpinCo itself can be bought and sold and spun-off as much as you want, but that doesn't accomplish anything of value because the BABA shares will still be stuck insider with a zero basis.  Getting to the shares so that they can be used to create value in some way is always going to trigger the tax as far as I know. 

 

I don't think the press coverage on the YHOO transaction has done a good job of really explaining what is going on.  From what I've seen, it's been portrayed as much more positive than it actually is, as if the BABA shares will truly be distributed to YHOO shareholders in a tax-free manner.  But distributing the shares tax-free, and distributing a SpinCo that owns the shares (with a zero basis) are two distinct things.  YHOO will be doing the latter.

[thepupil]

I agree with you now lu_hawk in that there is no way to extinguish the tax liability since being a RIC doesn't create pass through taxation (as you just schooled me and dropped tax code knowledge and a great analogue with REIT conversions).

 

I originally thought the tax liability would exist at the SpinCo level but could be passed through to non-taxable entities. This thinking was flawed.

 

So it becomes a question of "where it will trade"?

 

The rational answer is "somewhere between 0 and 35%" (not 0  and 20% as a I previously put forth, since the maximum corporate rate is what we are working with here).

 

If Berkshire spun out its interest in American Express or (insert highly appreciated stock here) into a spinco what would be the right discount?

 

What is the right way to account for a deferred tax liability that is unlikely to ever be voluntarily and immediately realized in full?

 

A few thoughts

 

1) I'm assuming eventual dividends from BABA (should those ever exist) will be passed through without issue because it's a RIC, so the SpinCo does help that. Or am I wrong again here?  If SpinCo never sold it would never pay tax and the theoretical gain to the shareholder (all future earnings and dividends would be the same).

 

 

2) There shouldn't be a liquidity discount since SpinCo will be spread amongst Yahoo's many mostly American institutional shareholders and be a large $32B (undiscounted) company.

 

Any institution who is picking between BABA and SpinCo will not encounter a huge difference in free float.

 

Since Alibaba is 34% owned by Softbank and 8% owned by Jack Ma and 15% owned by SpinCo, the existing BABA free float is only 1.1B shares ($90B at the moment). So SpinCo will be about 1/3 the size of BABA free float, but still quite substantial. More liquidity is always better than less in the world of big money, but all but the largest of whales will be able to buy SpinCo without much trouble. Yahoo trades about $700MM / day to BABA's $1.2B so there is less of a liquidity gap than the float size differences would have one believe. This is using Yahoo finance which could be wrong because let's be real anything from Yahoo the company sucks :). 

 

BABA has an options and swaps market that will allow for all kinds of fun things to do if the discount gets too big. This isn't like Lennar A/B (a 20% share class spread that's existed since the crisis) where one.

 

TL;DR I completely concede to your point that not much was solved on the tax front and all value creation from SpinCo is getting management's grubby hands off of those shares before they could do something dumb with it and cleaning up the story. I still don't think the discount will be very big though. Maybe I'm delusional.

 

 

[thepupil]

In case anyone is curious, here is where we are today.

 

Yahoooo is with core worth $6.5B (where sell side guys had it). Coreworthnothing is with yahoo core worth...nothing.

 

All percentages in the fancy schmancy multi-colored table are expressed as a percentage of the long leg which I believe is the correct way to view it.

 

Yahoo Japan is not discounted.

 

EDIT: And since there's all this news about Yahoo core going to shit, but perhaps zero is too punitive, "Goldilocks" is Yahoo worth $3B

 

[mcliu]

What about BABA issuing shares to acquire SpinCo (the entire corporation, not the underlying BABA shares) at a small discount?

 

That way they don't necessarily need to do anything with SpinCo's shares of BABA and the tax will be deferred forever.  ::)

 

BABA gets to repurchase shares at a discount to market and SpinCo holders save on taxes. Win-win?  ???

[lu_hawk]

What about BABA issuing shares to acquire SpinCo (the entire corporation, not the underlying BABA shares) at a small discount?

 

That way they don't necessarily need to do anything with SpinCo's shares of BABA and the tax will be deferred forever.  ::)

 

BABA gets to repurchase shares at a discount to market and SpinCo holders save on taxes. Win-win?  ???

 

Yes they can do that and defer the tax forever, but does that really count as shares that have been repurchased?

 

The shares would continue to exist and would not be retired.  EPS calculations would have to include those shares inside SpinCo. If BABA pays a dividend then the shares inside SpinCo would also receive that dividend and then you have to figure out if BABA could access the dividend cash without triggering a tax on either end.

 

If BABA were ever to be acquired in full, those shares inside SpinCo would also have to be acquired, which would trigger the tax.

 

So the shares would be held by a wholly owned sub of BABA, but I don't think you get many of the benefits of a share repurchase in that case. 

 

So again, I think that option is just another example of moving the shares and (and the tax liability) around.  In order to do anything with the shares you have to pay the tax.

 

[krazeenyc]

So Alibaba cannot buy SpinCo and just keep the shares as treasury shares? (like exxon?)

 

I assume they could just keep the shares as treasury shares indefinitely -- they would effectively be canceling the shares without actually ever doing so.

 

 

Remember I don't think Alibaba currently has any incentive to do this transaction (although they could be given an incentive).

[mcliu]

Does SpinCo need to sell their BABA shares though?

 

Maybe they can distribute their low-basis BABA shares to their shareholders.

 

If the shareholders are tax-exempt entities like a pension fund or an offshore entity like BABA, then the subsequent sale of BABA shares may not be subject to taxation?

[lu_hawk]

Does SpinCo need to sell their BABA shares though?

 

Maybe they can distribute their low-basis BABA shares to their shareholders.

 

If the shareholders are tax-exempt entities like a pension fund or an offshore entity like BABA, then the subsequent sale of BABA shares may not be subject to taxation?

 

Distributing the shares to shareholders would trigger the tax at the corporate level.  If SpinCo were to distribute the baba shares to its shareholders then it would have to pay the tax.  This is why YHOO can't distribute the BABA shares directly to shareholders but instead is doing the SpinCo transaction that they are doing.

 

See Code Sec 311(b)(1): if a corporation distributes appreciated property to its shareholders then the corporation will recognize a taxable gain in the amount of the FMV of the property (simply the market price of BABA in this case) minus the corporation's tax basis in the property (near zero).

[hillfronter83]

So Alibaba cannot buy SpinCo and just keep the shares as treasury shares? (like exxon?)

 

How about BABA acquires SpinCo and tender for $0.01/share? Nobody else will tender except SpinCo. Is it legal? This is similar to someone sell their house to their child for $1.

[lu_hawk]

So Alibaba cannot buy SpinCo and just keep the shares as treasury shares? (like exxon?)

 

How about BABA acquires SpinCo and tender for $0.01/share? Nobody else will tender except SpinCo. Is it legal? This is similar to someone sell their house to their child for $1.

 

Creative :).

 

This is an area of the tax law that I can't give any citations for, but I'd be very very surprised if a "trick" like this would work.  If SpinCo sold a share for $0.01/sh when that share trades in the market for $80/sh then that won't be treated as a legitimate transaction (because it is not).  It seems to me that this would simply be treated as a distribution made by SpinCo to BABA (because that is essentially what it would be).

 

[thepupil]

http://www.bloomberg.com/news/articles/2015-05-19/yahoo-shares-drop-on-potential-changes-to-irs-s-spinoff-rules

 

Spread has blown out on news IRS may change spinoff rules. Stub now $5.90, down from $10 or $11 since when we were last talking about it and flat since when we were first talking about it.

 

Yahoo back in the low 70s as a % of NAV and about 110% of fully taxed NAV with core marked at zero.

 

Currently

 

$6 Net Cash

$9 Yahoo Japan

$35 BABA

 

$50 cash and Asian assets + Yahoo Core

 

If we apply full tax discounts to Asian assets, you get

 

$24.60 BABA

$6.30 Japan

~$31  Asian Assets + $6.00 of cash for $37 so you would be paying $3 or $4 for core which is probably on the lower end of where people are valuing Yahoo's biz

 

 

For those who want to own BABA, I would argue it is a great time to rotate into YHOO since we're almost at a full tax discount. I personally am long Yahoo and short $50 calls and long $42 puts (I exited my BABA put spread after it fell a good amount) so I'm just chilling.

 

This is why you can't size things crazily on a stub basis. Shit happens and things change. In this instance the tail risk of IRS not being okay with this has increased.

[lu_hawk]

ThePupil,

 

Not being facetious at all, but want to ask, as a YHOO shareholder what do you think you will gain if YHOO is able to complete the tax-free spin, with SpinCo owning YHOO's BABA shares?

 

As I see it, because SpinCo will have a carried-over tax basis in the shares that is equal to YHOO's near-zero basis, and because SpinCo will be forced to recognize the full taxable gain upon doing anything of value with those shares, I don't see how Yhoo would be ahead at all.  What do you think Yhoo gains?

 

The tax would have to be paid by SpinCo rather than YHOO, does that help YHOO's shareholders at all?  Assuming current shareholders continue to hold SpinCo then current YHOO shareholders will take the tax hit just as if YHOO sold the shares itself and incurred the tax.  And YHOO shareholders can't avoid this by selling their SpinCo shares when received because SpinCo will presumably trade at a discount to account for the deferred tax liability.

 

If you agree with the me on the tax situation (and I think you do), then I really am curious on your thoughts as to how YHOO will benefit from doing the planned spin-off.

[thepupil]

I agree with you on all your points ref the tax basis in SpinCo's shares of BABA. You won that argument handily and were correct on all accounts.

 

It is not about what Yahoo gains so much as it is about what shareholders gain. Shareholders gain assurance on capital allocation  for the portion of YHOO that is BABA. That's why Starboard and all the others fought to make sure this would happen. People had nightmares they'd use their newfound riches to go on an acquisition spree to rival all acquisition sprees and maybe even sell BABA shares for cash and crystallize the tax loss. That's why the market was heavily discounting this when BABA first IPO'd.

 

SpinCo is about getting Yahoo management's hands off the pile of value that is BABA and allowing for every entity to develop a proper long-only shareholder constituency instead of a bunch of fast money event driven folks. Many people out there who want to own BABA want nothing to do with MaVenS and Yahoo Japan and all this other noise. Others who want to bet on the upsurge of a dying media company want nothing to do with a sexy growth company at a 50 PE.

 

Once SpinCo is liberated from Sunnyvale, those who own BABA can make the decision of whether or not the tax funkiness is worth swapping into SpinCo. SpinCo will just be a BABA derivative, instead of Yahoo now being a BABA derivative + all that other stuff. Others who want to buy Yahoo don't have to tie up all the capital they would putting 80 cents of every dollar into an unintended BABA bet.

 

I believe SpinCo will achieve a higher valuation / lower discount as a separate entity than it would inside Yahoo. We can argue whether the correct discount is 5% 10% or the full 35% but the market is pricing in a high discount in my opinion*. SpinCo, for all its faults, is still cleaner than (BABA+Yahoo Japan+Cash+Core). Also the opportunity for buybacks at RemainCo ( I thought the duration of the most recently authorized buyback was interesting in that it goes well beyond the expected SpinCo separation date, implying they want the option to buy back RemainCo shares) will be quite strong if RemainCo is valued where the market implies.

 

Is anything really gained economically / intrinsically by all this? Myeh. Not really. But as long as I'm comfortable with the absolute valuation I own things and I'm not dependent on crazy optimistic assumptions, I think it's a good trade and it's not completely sacrilegious to have a thesis on where something will trade. I think Yahoo Core is worth more than 0 and can eaily see it being worth $4-$6B or more and am comfy with Yahoo Japan. Marissa has proved herself not completely unworthy of a little benefit of the doubt in that she hasn't bought some $10B thing yet so I'm going to give em the benefit of the cash. Maybe that's a mistake, but she's been pretty good about buying back shares. 

 

Probably not the most clear and cogent way of putting it, but I think some of the conglomerate discount gets removed as pieces are separated. You will probably argue that the Yahoo conglomerate discount will be converted into a SpinCo tax discount. I think there will be a discount but it won't be nearly as big as implied. The answer being the same reason people add back the DTL when buying Berkshire. What's the proper discount for a tax liability that is far off in the future and unclear if it will ever be realized?

 

 

*Gross BABA / Yahoo share is about $37.55 as of the close. Yahoo is at $43.67, so that's $6.12 for the RemainCo stub. If you want to slap a full 35% discount on SpinCo then SpinCo  share is $24.4 and RemainCo. So the market is valuing RemainCo (depending on your view of the SpinCo discount) at $6-$19. RemainCo has $6 of Yahoo Japan (post tax), $6 of cash, and then Yahoo Core. So RemainCo is worth at least $12, even assuming a full markdown of core.  One way to calc the current implied SpinCo discount is to back out the cash and fully taxed Japan of $12 from the current share price, you get to $31.70, which is 85% of gross SpinCo  / share. So at this point in time market is basically saying "mark yahoo at 0, apply a 15% discount to SpinCo, and a full tax discount to Japan and that's how you get the price". If you think Yahoo Core is worth $4-$6 share then the market is pretty much applying a full 35%  SpinCo discount.

 

For me situations like this that are short-duration, liquid, relatively uncorrelated to general market valuations (but highly correlated to event driven and hedge fund flows/moves so they can blow out in periods of volatility which is both risk and opportunity), that have a very low chance of permanent capital, are a worthy way of trying to make a little dough.

 

I own other juicier and cheaper stuff, but for me trades like this have been additive to my wealth over time, though I'm the first to admit I'd much rather buy 50 cent dollars managed by wonderful people. FWIW, trading around the spread and getting a little lucky on moving around the hedge ratio (ie being not fully hedged when BABA at $80 and being overhedged when it was above $100) has netted me realized profits of about 20% on the most I've had at risk on the long side and multiples of that in terms of net market exposure and margin requirements. But I've been a little lucky.

 

That was long and incoherent.

 

 

 

 

[thepupil]

In short, separability itself has value.

 

Loews Hotels (worth about $1B ish, maybe, I'm working off of memory here) is valued by the market at 0, because you have to buy $15B of CNA, DO, and BWP to buy Loews hotels. The hotels are 7.5% of the market cap, so market says who cares? (and corporate overhead exceeds hotels earnings which have been de minimis). And market is correct too, because nice Jewish boys don't sell their mother's house (Lady Tisch resides at the Loews Regency New York*)

 

If L spun out its hotel business, it would have a market value greater than zero.

 

Similarly Yahoo core is worth (fill in your preferred value here). Let's say $4B. But you have to buy $49B of assets to buy it ( $37B of BABA, $6B of cash and $6B of Japan)  so once again, who cares?

 

Every step of separation or simplification will make the market care a little bit more because the value of

 

(sub valued at zero) / (total capital outlay )

 

increases as you decrease total capital outlay by separating out non-core stuff.

 

That's the basic premise of why Yahoo minus BABA is attractive at the current price.

 

 

*hey at least she pays inflation linked rent  ;D

Mrs. Joan H. Tisch, widow of Preston R. Tisch and mother of Jonathan M. Tisch, a member of the Company’s Office of the President, leases an apartment at the Loews Regency Hotel pursuant to a lease which was approved by our Audit Committee in 2001. The lease became effective upon the death of her late husband, Preston R. Tisch, our former Co-Chairman of the Board, in late 2005. The rent is set forth in the lease and adjusts upward each year by an amount equal to the increase in the consumer price index during the prior year. During 2013, Mrs. Tisch was required to vacate her apartment due to renovations at the hotel. She returned to the apartment in March 2014 and was reimbursed $250,000 by the Company for relocation expenses. Mrs. Tisch separately pays rent for another room at the hotel in an amount that was determined based on an analysis of market rates for comparable extended stay rentals at the Hotel. Mrs. Tisch paid the hotel an aggregate of $641,025 for these rentals in 2014.

[thepupil]

http://blogs.barrons.com/techtraderdaily/2015/07/06/yahoos-stock-has-upside-despite-baba-controversy-says-morgan-stanley/?mod=yahoobarrons&ru=yahoo

 

This article pretty much says it all. lots of tax inefficiency priced in here, low risk optionality.