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(Reuters) - Chinese e-commerce firm Alibaba Group acquired an 18 percent stake in web portal Sina Corp's microblogging service Weibo in its first big move into selling advertising on China's highly competitive social networks.
Sina's U.S.-listed shares surged 21 percent to $60.81 in early trading, before easing back to $56.90.
The $586 million deal, which values Weibo at over $3 billion, will provide more advertising revenue to Weibo as Sina tries to monetize the service and increase its lead over rival Tencent Holdings' social messaging product, WeChat.
The deal, seen by analysts as generously priced, should drive more web traffic to Alibaba's Taobao Marketplace, China's largest e-commerce website with a consumer focus.
Alibaba is tipped to go public within the next year.
Weibo, China's version of Twitter, has grown at a fast clip since its launch in 2009 and has gained from the blockage of Twitter by the Chinese government.
More than 500 million Chinese use Weibo to opine on everything from Korean soap operas to China's latest political intrigue.
"(The stake purchase) is as an endorsement from Alibaba ... of the value of Sina's Weibo platform," Morningstar analyst Dan Su said.
"This indicates the tremendous value of the data that is present on the Weibo platform that can be mined for a lot of activities, such as ecommerce."
Unlisted Alibaba, controlled by charismatic Chinese internet entrepreneur Jack Ma, also runs Alibaba.com, the country's largest business-to-business commerce platform, and Alipay, a PayPal-like online payment platform.
Ma, one of China's best known corporate leaders, reckoned to be worth $3.4 billion by Forbes late last year, built his e-commerce empire from scratch.
He plans to step down as CEO on May 10 and become executive chairman. Alibaba is likely to go public in a listing in Hong Kong that could value the company at about $100 billion, according to industry sources.
Alibaba has kept mum about its IPO plans, but its listing will likely be a windfall for Yahoo Inc, which owns nearly a quarter of the company.
Some analysts, who had valued Weibo between $600 million and $2.5 billion, said the deal offered by Alibaba was generous.
"We believe this deal is very positive for Sina. It instantly gives pricing to Sina Weibo with a valuation of $3.26 billion; the per share base could be $48," T.H. Capital Research analyst Tian Hou said.
"Sina's resource consolidation with Alibaba Group, which has a huge dominant position in China's e-commerce, can escalate Weibo's development," she said.
Sina, which makes most of its revenue from online advertising both on its website and Weibo, has had investors worried as the growth rate of Chinese online advertising slows. Its shares have slipped 15 percent in the last 12 months.
Maxim Group analyst Echo He said the Alibaba deal would help Sina in the longer term, but giving Sina cash would not solve its problems and its valuation would still depend on its own profitability.
This is not the first time Sina has tied up with a major Chinese company to seek new streams of revenue.
Sina allied with Baidu Inc last year, integrating Baidu search in its mobile website, while Baidu said its cloud initiative would come with the Weibo app preinstalled.
The analysts said Sina could potentially team up with many other companies, while Morningstar's Su said the deal ruled out any near-term plans for another such major alliance.
Sina has also granted Alibaba the option to increase its stake in Weibo to 30 percent within a stipulated time, which it did not specify.
The alliance is expected to generate about $380 million in advertising and social commerce services revenue for Weibo over the next three years, Sina said in a statement.
Additional reporting by Supantha Mukherjee; Editing by Saumyadeb Chakrabarty