Yahoo's planned spinoff of its stake in Alibaba is likely to proceed on a tax-free basis, analysts said, as Yahoo shares regained most of their losses after concerns of a possible change in US tax rules spurred a slide on Tuesday.
The stock closed up $1.81 to $42.73 on the Nasdaq on Wednesday, after it fell $3.38 on Tuesday, wiping more than $3 billion off its market value after a US Internal Revenue Service (IRS) official said it may consider a change to its spinoff rules.
"Anything can happen, but I'm going with the bet that this won't impact spinoff of Alibaba shares for Yahoo," said Axiom Capital analyst Victor Anthony.
A tax-free spinoff of the Alibaba stake was "more than likely", Raymond James analysts said, but reduced its probability estimate from 80% to 60%.
A change in tax rules, however, will pose some risk to the company's ability to spin off Yahoo Japan, Anthony said.
The search company said last month it had hired advisers to help evaluate options for its Yahoo Japan stake, which analysts estimate could fetch more than $5 billion after tax.
Yahoo plans to spin off a $34 billion stake in Alibaba into a public company along with Yahoo Small Business that provides domain names and local marketing. It submitted a request to the IRS in the first quarter regarding the spinoff. Current rules make a spinoff tax-free if the entity being separated has an active business.
If taxed at the full 40% rate, Yahoo shares would be worth just about $20 billion, wrote SunTrust Robinson Humphrey analyst Robert Peck.
The IRS, however, was unlikely to announce such a major change through a "non-senior" official at a Washington, DC Bar Association event, he said.
Yahoo was working to complete the spinoff in the fourth quarter, a spokesperson said on Wednesday, adding the IRS said requests already in process would not be frozen.
"There is some government suspicion that the Yahoo spinoff is merely a shell for its investment holdings and that new guidelines could establish new rules of the road for spinoffs and active business levels," wrote Guggenheim Securities analyst Chris Krueger.
Yahoo Small Business has about $50 million in earnings before interest, taxes, depreciation and amortisation.
Even if IRS changes its rules and deems Yahoo's planned spin-off taxable, the search giant may find ways to soften the blow.
Yahoo can get a similar result by spinning out its core business, leaving behind the so-called active business with its untaxed Asian assets, Nomura analyst Anthony DiClemente wrote.
A sale of all of Yahoo, possibly to Alibaba, was also an option.
Alibaba CEO Jack Ma could buy Yahoo in a cash-and-stock deal, claw back the stock and essentially cancel the shares that he just issued, BGC Partners analyst Colin Gillis told Reuters.
"Because of the tax advantage that he would receive in doing that, he would be a bidder that no other bidder could be."
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