UPDATE 5-Alibaba buys back stake held by Yahoo for $7.1 bln
* Alibaba to pay at least $6.3 bln cash for 20 pct stake
* Yahoo to give most of after-tax cash proceeds to holders
* Alibaba has incentive for IPO by end-2015
* Alibaba talks to Temasek, others to raise equity-sources
SHANGHAI/NEW YORK, May 21 (Reuters) - Chinese Internet entrepreneur Jack Ma's Alibaba Group is buying back up to half of Yahoo Inc's 40 percent stake for $7.1 billion in a deal that moves the Chinese e-commerce leader closer to a public listing.
Under the agreement, Yahoo will sell one-half its stake in Alibaba for at least $6.3 billion in cash and up to $800 million in new Alibaba preferred stock. The deal, announced on Monday, caps years of often acrimonious talks between Alibaba and Yahoo over how the Chinese company could reclaim some or all of the stake that Yahoo bought for about $1 billion in 2005.
While Ma had a strong rapport with Jerry Yang, the Yahoo co-founder who led the initial investment in Alibaba, ties between the two companies soured when Yang was ousted and replaced as Chief Executive by Carol Bartz.
Relations were also complicated by a spat over the Chinese group's payment unit Alipay, and Yahoo's attempt to appoint more directors at Alibaba.
Talks over a deal for Ma, who owns nearly 7.5 percent of Alibaba, to buy back most of the Yahoo stake for up to $9 billion faltered earlier this year over valuation.
The deal came after a management and board revamp at Yahoo, which appointed a new interim CEO in the last week and gave three of 11 board seats to Third Point, the hedge fund run by activist investor Dan Loeb.
But interim CEO Ross Levinsohn said the timing of the deal, after the governance changes, was a coincidence as Yahoo had been negotiating for months. Yahoo will consider collaborating with Alibaba on new initiatives, he said.
"We're happy at the way this has evolved in the last few months," Levinsohn said, suggesting one option could be for Yahoo to help Alibaba expand beyond China. "It's a big step forward that we're talking about strategic initiatives."
Yahoo, which has been under fire from shareholders for failing to move aggressively to reverse a decline in advertising revenue in the face of competition from Google Inc and Facebook, will hand most of proceeds from the Alibaba stake sale, after taxes, to shareholders.
"For Yahoo it's a decent compromise. They were never going to keep all the 40 percent stake and expect to see these guys (initial public offering). I think they sold it off at a pretty reasonable valuation," said Michael Clendenin at RedTech Advisors in Shanghai. "Yahoo still has a lot of bigger problems ahead of them. I mean, they are a portal, so they're going the way of the dodo bird."
"Credit to Jack Ma. He's a wheeler and dealer, and he got a very good deal on this one," he added.
A source familiar with the deal said Yahoo built in incentives for Alibaba, which operates the popular Chinese online marketplace Taobao, to hold an IPO by the end of 2015. Alibaba would buy back one-half of Yahoo's remaining stake -- a 10 percent holding -- at the IPO price or allow Yahoo to sell those shares in the offering before the end of 2015.
Alibaba Group, valued at $30 billion to $35 billion, listed its Alibaba.com unit in 2007, and last February agreed to take it private.
"The valuation is reasonable ... but I don't think this is going to affect the IPO strategy," said Elinor Leung, an analyst at CLSA. "I don't think the IPO is going to be imminent, meaning this year. Net-net, this is going to be positive for Yahoo because you cash out on half the stake, but Yahoo's main worry is their U.S. business."
Alibaba said it would raise the money for the deal through a mix of cash, debt and equity.
Sources said the group was in talks with existing shareholders, including Singapore state investor Temasek Holdings Pvt Ltd, to raise about $2.3 billion in equity to partly finance the deal.
Alibaba was not immediately available to comment and a Temasek spokesman declined to comment.
Temasek bought shares from Alibaba employees in September in a tender offer in which DST Global, Silver Lake and Yunfeng Capital also took part.
According to Basis Point, a Thomson Reuters publication, Alibaba is likely to increase a $3 billion loan for taking its listed unit private to $4 billion.
Alibaba has long been the dominant player in China's booming e-commerce sector, but the landscape in the world's biggest Internet market is evolving, with Amazon.com Inc, Dangdang Inc and 360buy emerging as tough competitors.
Taobao has about 90 percent of the market in China's consumer-to-consumer online trading and more than 53 percent of the business-to-consumer market.
Yahoo's Alibaba stake and its 35 percent holding in Yahoo Japan -- jointly owns with Softbank Corp -- are considered the crown jewels of the U.S. Internet company.
Some investors have said Yahoo should monetize some of the holdings and return proceeds to shareholders. Softbank owns about 30 percent of Alibaba.
Analysts have said selling off the Asian assets would raise cash for Yahoo and simplify its structure, making it easier for investors to value its core U.S. operations.
Yahoo said it would return "substantially all" of the after-tax cash proceeds from the deal to shareholders, increasing a planned share buyback authorization by $5 billion.
The deal marks an important accomplishment and an early sign of progress for interim CEO Levinsohn, the fifth person in the top job in the past five years. Yahoo has suffered from falling revenues, layoffs, management reorganizations and executive departures.
Many analysts expect Levinsohn to re-orient the company around its media properties, including Yahoo Sports and Yahoo Finance, while focusing less on expensive technology efforts such as search and social networking.
Levinsohn follows Scott Thompson, who resigned earlier this month after he was accused of overstating his qualifications, and Bartz, who was fired last September.
Finalizing a deal with Alibaba could allow Levinsohn to focus on a comeback plan, while potentially earning goodwill from investors who are frustrated by missteps and poor performance.
"For Yahoo, this is something that needed to get done because Alibaba was having a bit of an issue with ... the group being so dominantly owned by foreign entities," Nomura Securities analyst Jin Yoon told Reuters.
"The China asset was kind of their crown jewel so I don't actually expect Yahoo to fully depart from China and I do expect Yahoo will have some sort of remaining involvement with Alibaba Group."
Sunnyvale, California-based Yahoo and Japan's Softbank agreed to cap their shareholder voting rights in Alibaba at below 50 percent, said one source familiar with the matter, effectively keeping foreign ownership in check.
In addition to the share repurchase, Yahoo and Alibaba will amend their existing technology and intellectual property licensing agreement. Alibaba will continue to operate Yahoo China under the Yahoo brand for up to four years.
Yahoo will be freed from restrictions on making other investments in China. Alibaba will make an upfront lump sum royalty payment of $550 million to Yahoo and pay royalties for up to four years.
UBS was lead financial adviser to Yahoo, while Credit Suisse advised Alibaba.
Yahoo shares rose 15 cents at $15.56 in morning trade on Nasdaq after hitting $16 earlier in the session.