Yahoo Inc (YHOO.O) shares rose 6 percent in premarket trading after Alibaba Group agreed to buy back up to half of the U.S. company's 40 percent stake in the Chinese Internet giant for $7.1 billion.
The deal also clears the way for an initial public offering of the company founded by Chinese entrepreneur Jack Ma that may in turn help Yahoo realize greater value for its remaining stake, Evercore Partners said in a research report.
Yahoo, which has come under fire from shareholders for failing to take aggressive action to reverse a decline in advertising revenue in the face of competition from Google Inc (GOOG.O) and Facebook (FB.O), will hand most of the sale proceeds, after tax, to its stockholders.
The share repurchase is massive enough that Yahoo shareholders should benefit meaningfully in the short-term, and the path to an IPO for Alibaba could drive additional upside in the longer term, brokerage Stifel Nicolaus said in note.
Yahoo shares were up 93 cents at $16.35 in trading before the bell on Monday.
(Reporting by Supantha Mukherjee in Bangalore; Editing by Sreejiraj Eluvangal)