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Yahoo to Spin Off Remaining Alibaba Stake Worth $40 Billion to Shareholders

Yahoo will spin off its 15.4% remaining stake in Chinese e-commerce giant Alibaba Group, valued at about $40 billion, in what it touted as a tax-free spinoff.

Yahoo’s board authorized the spinoff of its holdings in Alibaba — which launched an IPO raising $21.8 billion last fall, one of the biggest public offerings ever — into a newly formed independent registered investment company dubbed “SpinCo.” The stock of the new company then will be distributed pro-rata to Yahoo shareholders, resulting in SpinCo becoming a separate, publicly traded company, and avoiding a 40% tax hit on the sale (roughly $16 billion).

In after-hours trading, Yahoo shares were up more than 7% on the news. Following the spinoff, Yahoo will continue to operate its core business and hold its 35.5% interest in Yahoo Japan.

Yahoo CEO Marissa Mayer, who has been under pressure from activist investor group Starboard Value and others to return the value of the Alibaba holdings to shareholders, noted that via share repurchases to date the company has returned approximately $9.7 billion of proceeds from Alibaba. After the spinoff of the remaining shares, Yahoo will have returned nearly $50 billion of value to shareholders.

“This level of capital return is historic, especially for a company of our size,” Mayer said. “The plan announced today vividly demonstrates our commitment to being good stewards of capital and increasing shareholder value.”

The spinoff of Alibaba shares is “unambiguous goodness to YHOO holders and exactly the resolution activists have been calling for,” RBC Capital Markets analyst Mark Mahaney wrote in a note.

Yahoo said it expects the spinoff to occur in the fourth quarter of 2015 after the expiration of its one-year lockup agreement on the Alibaba shares in connection with the IPO.

Out of the Alibaba IPO in September, Yahoo reported a pre-tax net gain of $9.4 billion (after deducting underwriting discounts and commissions) and expects to pay $3.3 billion in taxes on that stock sale in the current quarter. In 2012 Yahoo raked in $7.6 billion after selling about half its then-40% stake in the Chinese company, of which it kept about $4.3 billion and returned about $3.65 billion to shareholders.

Yahoo still has a sizable war chest to work with — and potentially make future acquisitions. As of Dec. 31, 2014, the company had $10.2 billion in cash, cash equivalents and marketable securities, roughly double from the year prior.

In the wake of the Alibaba IPO, analysts suggested Yahoo could use its cash to buy video content or advertising-technology firms. In November 2014 Yahoo announced a deal to acquire BrightRoll, a programmatic video-advertising platform, for $640 million in cash.

As for Yahoo’s operating results for Q4 2014, there were few surprises. Total revenue for the period (excluding traffic acquisition costs) was $1.18 billion, flat from the year earlier and slightly below Wall Street expectations. Adjusted earnings of $409 million — including $88.4 million of goodwill impairment and a $32.9 million restructuring charge — was down 4% from the year prior but higher than analyst estimates.

With the spinoff of the Alibaba stake, “the time is soon coming where operating results will matter once again,” Pivotal Research senior analyst Brian Wieser wrote in a note. “Although there are some reasons for optimism, much more success in execution than has been produced to date will be required for the company’s core business to resume meaningful growth.”

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