Analysts still see Yahoo moving forward with Alibaba spinoff

Analysts continue to see a possibility of Yahoo Inc.’s Alibaba spinoff a day after the Internal Revenue Service issued a private letter resisting the move.

Yahoo had been planning to spin off its Alibaba stake, valued at $40 billion, in a shareholder friendly move. The IRS declined to rule on whether Yahoo could do this, meaning the company faces uncertain terrain going forward.

Nomura analysts say they believe the IRS’s private letter ruling does not have much of an impact on Yahoo’s plans and that the company is likely to go forward with the Aabaco spinoff.

“In our view, the announcement only modestly reduces the ultimate probability of a successful tax efficient spinout of Aabaco from YHOO,” Nomura analysts wrote.

Nomura analysts said they wish the company executives had said they are still committed to the spinoff, rather than saying they will “consider the company’s options, including the spinoff transaction.” The analysts lowered their price target to $40 from $48 and reiterated a buy rating.

Alibaba said Tuesday that China’s larger economic issues are negatively affecting consumer spending, causing Cantor Fitzgerald analysts to lower the price target for Alibaba   to $88 from $95, but maintain a buy rating.

The economic pressure on Alibaba and uncertainty about its valuation should push Yahoo to finish the transaction quickly, the analysts say, adding that the Alibaba shares were the “reason to buy YHOO stock in the first place.”

Due to uncertainty on Yahoo’s actions and the lowered price target for Alibaba, Cantor Fitzgerald analysts lowered the price target to $45 from $56 and maintained a buy rating.

J.P. Morgan analysts lowered their price target to $44 from $51, also citing Yahoo’s uncertainty and China’s recent economic troubles.

“We believe the lack of ruling creates increased risk around the potential tax-free transaction,” J.P. Morgan analysts said.

Sun Trust analysts said they believe the market has already “baked in” the worst case scenario where Yahoo’s Alibaba stake is taxed at 40%. Otherwise they see a few different scenarios where Yahoo goes forward with the spinoff and sets money aside in case the IRS rules against the tax-free spinoff or goes another direction such as returning capital or investing in its core business.

SunTrust analysts lowered the price target to $40 from $50 and maintained a buy rating.

Shares of Yahoo were up 2% Wednesday. Yahoo shares have lost 14% in the past month, compared with the S&P 500’s loss of 5%.