Alibaba to Buy Back Yahoo! Stake for $7.1 Billion

Alibaba Group Holding, Ltd. is buying back a 20% stake that Yahoo! Inc. owns in company shares, for about U$ 7.1 billion. The deal will be beneficial for both companies, as it may pave the way for Alibaba to pursue an IPO in the next 18 months, and for Yahoo! to off-load its Asian investments, which it has considered difficult to monetize.

A Chinese man walks past Yahoo! and Alibaba logos in this file photo from when Yahoo! initially invested in Alibaba. Yahoo! and Alibaba have reached an agreement for the Chinese company to buy back half of Yahoo!'s 40% stake for US$ 7.1 billion. (AP Photo/Elizabeth Dalziel)

Aside from Yahoo!, China’s biggest e-commerce provider also has private investment from Temasek Holdings, Digital Sky Technologies, and Silver Lake, among others. According to a source cited by Bloomberg, Alibaba plans to finance its deal with a mix of cash and debt.

Alibaba has been trying to buy back Yahoo!’s stake for years, and has ramped up its efforts after the American company fired CEO Carol Bartz due to performance issues. Yahoo! has been planning to off-load its Asian investments, in light of its offers for other American companies to take over its core business.

Yahoo currently owns 40% of Alibaba, and the planned deal will cut this holding in half. Yahoo! had acquired this stake in Alibaba in 2005, in exchange for US$ 1 billion and ownership of Yahoo! in China. However, Alibaba and Yahoo! had a falling out in 2010 when the latter was said to have supported Google in the web-censorship arguments with the Chinese government. In 2011, Alibaba spun off its Alipay online payment system to a unit owned by CEO Jack Ma without first consulting Yahoo!.

According to AllThingsD, Yahoo! held a board meeting to review the transaction, and may consider a shareholder dividend payment if the deal pushes through. The company values these shares at US$ 7.1 billion — 20% of Alibaba’s current US$ 35 billion valuation. The stock buy-back will be done in US$ 6.3 billion in cash and US$ 800 million in newly-issued Alibaba preferred stock.

Both Yahoo! and Alibaba have confirmed the deal in a joint media release. The transaction will involve a taxable share sale agreement, in which Alibaba will buy back its shares after taxes of about 35% are paid on long-term gains. The deal is reported to net Yahoo! some US$ 4 billion.

Both parties have likewise agreed on additional terms:

  • Yahoo! will grant Alibaba a transitional license t continue operating Yahoo! China for up to four years;
  • Restrictions on Yahoo!’s other investments in China will be lifted;
  • Alibaba will license certain patents to Yahoo!;
  • Yahoo! will have continued representation in the Alibaba board;
  • Alibaba will likewise be required to either repurchase a quarter of Yahoo! shares at IPO price, or allow Yahoo! to sell these in the IPO.

It can be noted that Microsoft made an unsolicited offer to acquire Yahoo! for US$ 47.5 billion in 2008, which Yahoo! declined.¬†Yahoo! is currently valued at US$ 18.8 billion — a far cry from the company’s valuation during its peak. ¬†With its gradual off-loading of Alibaba holdings, Yahoo will be better-able to pursue financing options for its core business, which may include a takeover or acquisition by another company.