Altaba: Still A Better Investment Than Alibaba

Summary

• Altaba's dissolution plan will give shareholders cash and potentially ADRs of Alibaba.
• You can buy Altaba now fully discounted for Alibaba's tax concerns.
• Positive tax reform or an Alibaba share repurchase would bring instant value to shareholders with Alibaba tracking the worst-case scenario.

The writing is on the wall for Altaba Inc. (NASDAQ:AABA), as its board has approved the dissolution and liquidation of the fund's assets by the end of 2019 contingent on shareholder approval. Altaba is almost exclusively made up of Alibaba Group Holding Limited (BABA) shares now along with cash, so it basically tracks Alibaba with a tax discount built into its shares. Altaba shareholders get Alibaba shares at a discount of already being fully taxed; so, in the future, if there is positive tax reform or if Alibaba does a share buyback, current Altaba shareholders will receive instant value for their shares as the discount rate between the two stocks will immediately shrink. The worst-case scenario would be that it continues to simply track Alibaba at around the current corporate tax rate or negative tax reform happens.

Altaba was formed after Yahoo's core assets were sold to Verizon Communications Inc. (VZ) in a $4.48B deal. It was spun off as a separate entity comprised of its massive ~15% stake in Alibaba stock, ~36% ownership of Yahoo Japan Corporation (OTCPK:YAHOY), and its IP patent portfolio labeled Excalibur. Since then, management has fully sold off its Yahoo Japan stake leaving it with mainly cash and Alibaba stock as it can easily sell its Excalibur IP portfolio at a discount, meaning it is relatively worthless compared to the value of Altaba's Alibaba stock holdings. Management initiated a $5.75B share buyback program while it looked to find a tax-advantaged way to get rid of its Alibaba holdings. However, this has not produced results by finding either a tax loophole to use or by getting Alibaba to personally do a share repurchase of some or all of Altaba's holdings. Thus, Altaba has prudently decided to liquidate its fund and to give investors cash and potentially ADRs (American Depository Shares) of Alibaba unless a tax-advantaged option presents itself before the close of Altaba's fund in late 2019.

Since Altaba's inception, it has consistently outperformed Alibaba because as the value of Alibaba's shares rises over time, the gap naturally widens between the two entities as the built-in value of the tax discount becomes bigger and bigger as the capital gains rack up.

Data by YCharts

According to Altaba's website, the fund currently has a NAV (Net Asset Value) per share of $107.82 based primarily of Alibaba shares and cash on hand. Altaba closed last Friday with a price of $79.15 a share, meaning that an investor receives an ~26.6% discount for a fund comprised of almost all cash and Alibaba shares based on the closing price of Alibaba shares at $195.21. This 26.6% discount reflects the fact that if Altaba's management went and sold its Alibaba shares on the open market and distributed the resulting cash to shareholders, they would get approximately around the current share price of Altaba stock in cash after capital gains taxes were subtracted from the open market sales of Alibaba stock. The question arises then why doesn't management simply take the hit and just sell all the Alibaba shares and give cash back to shareholders at the end of the year? The answer is primarily because there will always be a future possibility of a tax-advantaged way to sell the Alibaba shares that could unlock additional value for Altaba shareholders even after the potential spin off.

Altaba shareholders have already experienced tax reform that has affected the discount that is built into its shares after President Trump initiated his tax reform lowering corporate tax rates to 21%. This reform created instant value for Altaba shareholders as its stock would have traded in the past closer to a 35% discount instead of around 26.6% that it is trading currently. President Trump has hinted at some additional tax reforms potentially coming in the future while Democrats also might work on tax issues if they get put into power in 2020 which might create a benefit or negative for shareholders of Alibaba ADRs if management ends up spinning them off at the end of 2019.

With management drawing a line in the sand for dissolution and liquidation, they might also be trying to do a last minute deal with Alibaba itself for a share buyback of part or all of Altaba's Alibaba shares. Alibaba doing a buyback of its own shares from Altaba is the only way right now for Altaba shareholders to get rid of their Alibaba shares in a tax-free manner as share buybacks by companies are not taxed. Thus, if Altaba could sell its Alibaba shares back to Alibaba at let's say a 10% discount to Alibaba's current share price, Alibaba would be able to do a buyback at a very nice discount to its open market share price, and Altaba shareholders would get to sell their shares for cash at a 10% discount instead of taking a more massive tax hit around the 21% implied by the current corporate tax rate and the 26.6% discount built into the value of its shares as it tracks Alibaba.

With pretty much nothing left of Altaba except cash and Alibaba shares, it is time for the fund to end as its mission is pretty much fulfilled in liquidating non-core assets while trying to find a tax-advantaged way to get rid of its Alibaba stake. A date and time for dissolution will allow any final deals with Alibaba to show up, as it plans to give shareholders cash back along with Alibaba ADRs which at worst will track shares of Alibaba with a built in discount around the current corporate tax rate. There is always a chance though at a future buyback deal with Alibaba or additional tax reform that could affect the discount that the Alibaba ADRs will trade at. I continue to hold a position in Altaba with the plan to own Alibaba ADRs after the liquidation while using the cash portion of Altaba's liquidation to buy shares of Alibaba stock itself. Best of luck to all.

Disclosure: I am/we are long AABA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.