* 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
By Melanie Lee and Soyoung Kim
SHANGHAI/NEW YORK, May 21 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
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
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
"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
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.