By Melanie Lee and Soyoung Kim
SHANGHAI/NEW YORK (Reuters) - Chinese Internet entrepreneur Jack Ma is buying back up to half of a 40 percent stake in his Alibaba Group from Yahoo Inc 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 half of 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 in a joint statement on Monday, caps years of talks between the two firms over Alibaba reclaiming some or all of the 40 percent stake that Yahoo bought for about $1 billion in 2005.
A source familiar with the deal said Yahoo built in incentives for Alibaba, which operates the popular Chinese online marketplace Taobao, to hold an initial public offering by end-2015.
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 and Facebook, will hand most of the sale proceeds to its stockholders.
"For Yahoo it's a decent compromise, they were never going to keep all the 40 percent stake and expect to see these guys IPO. 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.
According to the statement, Alibaba would buy back 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 end-2015. Alibaba Group is valued at $30-35 billion.
Alibaba Group listed its Alibaba.com Ltd unit in 2007. Alibaba, which has long been the dominant player in China's booming e-commerce sector, in February agreed to buy out Alibaba.com, and founder Ma has said an IPO would reward employees for their service.
"The valuation is reasonable ... but I don't think this is going to affect the IPO strategy," said Elinor Leung, 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."
COMPETITIVE LANDSCAPE
The e-commerce landscape in China, the world's biggest Internet market, is evolving with Amazon.com, Dangdang and 360buy emerging as tough competitors, and an IPO would help Alibaba compete better. Taobao has around 90 percent market share 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, which it jointly owns with Softbank Corp are considered the crown jewels of the struggling U.S. Internet company. Some investors have said Yahoo should monetize some of those holdings and return the proceeds to shareholders. Softbank owns around 30 percent of Alibaba.
Analysts have said most of Yahoo's value is locked up in its Asian assets and selling them down would simplify its ownership structure, making it easier for investors to value Yahoo's core U.S. operations.
Yahoo said it would return "substantially all" of the after-tax cash proceeds from the deal to its stockholders, increasing a planned share buyback authorization by $5 billion.
The deal marks an important accomplishment and an early sign of progress for Yahoo interim CEO Ross Levinsohn, the fifth person to step into the top job at the troubled company in the past five years, which have seen falling revenue, 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 tech efforts such as search and social networking.
Finalizing a deal with Alibaba could remove a distraction, allowing Levinsohn to focus on a comeback plan, while potentially earning goodwill from investors 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 (Yahoo's) 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."
TROUBLED TIES
Ma had a strong personal rapport with Jerry Yang, Yahoo's founder and the man who led the initial investment in Alibaba, but ties between the two firms soured when Yang was ousted and replaced by Carol Bartz.
Bartz was fired last September and replaced this year by Scott Thompson, who stood down earlier this month after he was accused of overstating his qualifications.
Ma, who owns close to 7.5 percent of Alibaba, has tried to buy back the 40 percent of his company owned by Yahoo several times in recent years, only to be rebuffed by Yahoo. The often rocky relationship between the companies came to a head a year ago when it was revealed Alibaba had abruptly handed Alipay - an online payment systems - to a company controlled by Ma, apparently without Yahoo's knowledge.
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 issue, 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, with Alibaba continuing to operate Yahoo China under the Yahoo brand for up to four years.
Yahoo will be freed from restrictions on it making other investments in China. Alibaba will make an upfront lump sum royalty payment of $550 million to Yahoo and keep paying royalties for up to four years.
Alibaba will license certain patents to Yahoo.
(Additional reporting by Jonathan Gordon and Chyen Yee Lee in Hong Kong and Alexei Oreskovic in San Francisco; Editing by Ian Geoghegan and Muralikumar Anantharaman)
