Spinning the story

Yahoo!'s Alibaba spin-off gives Mayer one more year

It may have been the easiest activist case ever made. Yahoo! is to offload its $40-billion stake in Chinese e-commerce giant Alibaba to its shareholders. The latest uppity shareholder involved, Starboard Value, may try to take credit but it has been an obvious goal for years. Though Yahoo!'s much smaller core business will be left exposed, the spin-off timing gives Chief Executive Marissa Mayer another year to make her turnaround count.

Yahoo! is going to put its remaining 15 per cent stake in Alibaba into a new investment vehicle, throw in a smallish operating business - required to clinch the desired tax-free treatment for the transaction - and distribute the shares in the vehicle to Yahoo!'s existing owners. Starboard and others have proposed spinning off the US company's $7-billion stake in Yahoo! Japan as well, but Alibaba is the bigger item by far and the new company will be a fairly clean, if indirect, proxy for the Chinese group.
 
That said, SpinCo, as Yahoo! unimaginatively calls it, will probably trade at a discount to the value of its Alibaba shares, because ownership will be once removed and SpinCo will, presumably, still incur a US gains tax hit if it sells any of its stake. Still, figuring out how a deal can be done is an achievement for Mayer and her colleagues, and investors greeted the news with a 7 per cent boost to Yahoo!'s roughly $50-billion market cap.

The company's fourth-quarter earnings headlines, though, were less promising. Revenue and profit declined from a year earlier. In Yahoo!'s summary of key metrics, only the number of employees and the cash balance increased, the latter thanks partly to the sale of some shares in Alibaba's initial public offering.

Mayer, in her job since mid-2012, sounds confident that the picture will soon turn more positive. She points to the potential of acquisitions like video advertising outfit BrightRoll and improvement in other investment areas, like a 23 per cent increase in mobile revenue from the third quarter. These "transformative" business lines are growing, but not yet enough to change the direction of the big-picture numbers.

The spin-off requires more legal detail and a ruling from the US Internal Revenue Service - as well as a wait until Yahoo!'s post-IPO lockup expires. So it won't happen until the last quarter of this year. When the cover provided by the Alibaba stake is gone, Mayer needs to have the new businesses cranking out the lucre.