AABA Altaba Inc

By Gillian Wong 

BEIJING -- Alibaba Group Holding Ltd. could face a tax hit if it decides to pursue buying back Yahoo Inc.'s 15% stake in the Chinese e-commerce giant, analysts said.

The Wall Street Journal reported on Tuesday that Yahoo's board is planning a series of meetings to discuss its core Internet business and its stake in Alibaba, citing people familiar with those plans. Yahoo's management has faltered in its efforts to turn around its core business and it faces investor pressure to take more dramatic moves, though the people familiar with the plans say no transaction is assured.

If Yahoo decides to sell its core Internet business, it could put into motion a deal for the Alibaba stake as well as its 35% stake in Yahoo Japan. One possible scenario could see a U.S. media company or private-equity firm team up with a buyer interested in the Alibaba stake, potentially Alibaba itself.

Such a deal could work like a stock buyback, potentially offering Alibaba a discount on its own shares, and eliminate the overhang and uncertainty surrounding Yahoo's holding in the Chinese Internet giant. Alibaba's shares have been on a roller coaster since its blockbuster $25 billion initial public offering in September 2014.

Three years ago, Alibaba bought about half of Yahoo's then-40% stake in a deal valued at about $7.6 billion with the backing of China's sovereign-wealth fund China Investment Corp. and a clutch of private-equity firms.

Alibaba buying the rest of Yahoo's stake would require savvy deal making to avoid a huge tax bill on Yahoo's gains from the Alibaba shares. Analysts said with that in mind, the e-commerce giant may instead continue to focus on fending off competition domestically and expanding internationally.

"In the near term, I think they have no interest," said Sean Zhang, an analyst with 86Research Ltd. in Shanghai. "They will continue to focus on growth, focus on building a more competitive company, instead of spending a lot on buying a piece of stake."

In its most recent earnings report, Alibaba said it had net cash of $2.3 billion. Asked about Alibaba's interest in Yahoo's stake, Executive Vice Chairman Joe Tsai said during an October call with analysts that Alibaba would or buy back its shares "if it is very significantly accretive to our shareholders, and that's the principle we operate on."

If the transaction didn't impose too much debt on its balance sheet, Alibaba would likely want its shares back, said Brendan Ahern, chief investment officer at KraneShares, a manager of China-focused exchange-traded funds that own Alibaba stock.

At its current price level, Alibaba's stock is also relatively inexpensive and low U.S. interest rates might make it a good time to take on some debt, Mr. Ahern said. "They're running a real fine line between a strong desire to bring this back into the fold and at the same time you'd hate to allow that desire to jeopardize what is currently a strong balance sheet," he said.

Alibaba's shares, which have been hit by concerns about China's economic slowdown and rising competition, have recovered in recent months after strong sales results and are now trading about 24% above their IPO price last year of $68. Still, they are down about 20% from a year ago.

Alibaba could also be interested in Yahoo's core Internet business for branding purposes, said Henry Guo of Summit Research LLC. "It's attractive to Alibaba in terms of expanding its brand awareness in the U.S. in the long run," Mr. Guo said. "Because Yahoo's core business is under pressure, and underperforming, I think Alibaba could get a good bargain on this."

Alibaba could leverage Yahoo's traffic from its portal business, Yahoo finance, sports, and other websites on which Alibaba could place more advertising, he added.

Carlos Kirjner, an analyst at Sanford C. Bernstein & Co., said he thought Alibaba had no interest in Yahoo's core business, but "would consider an acquisition of all or part of Yahoo's stake in Alibaba if it found a financially attractive way to structure the transaction." Such a transaction could be attractive to Alibaba if the price took into account the tax burden, or if Yahoo paid the taxes, for example, Mr. Kirjner said.

Rick Carew contributed to this article.

Write to Gillian Wong at gillian.wong@wsj.com

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(END) Dow Jones Newswires

December 02, 2015 00:34 ET (05:34 GMT)

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