Internet giant Yahoo!, Inc. (YHOO) has finally reached an agreement late Sunday to unload its holdings in China-based Alibaba Group Holding Ltd. in three tranches after several failed attempts earlier.
Yahoo has agreed to sell back half of its 40 percent stake to the Chinese e-commerce firm in a cash and stock deal valued at about $7.1 billion, based on an estimated market valuation of about $35 billion for Alibaba. The first tranche is expected to close within the next six months.
However, the final consideration will be reached based on a valuation of Alibaba to be established through equity financing that Alibaba intends to undertake to finance the deal. The consideration for the 20 percent stake will include at least $4.3 billion in cash and up to $800 million in newly-issued Alibaba preferred stock.
Alibaba, which runs the site Alibaba.com, intends to finance the repurchase through a combination of its own cash resources, debt, equity and equity-linked financing. However, it will have to repurchase at least 10 percent stake even if financing deal is not reached, and complete the 20 percent repurchase when the requisite financing is obtained.
"Today's agreement provides clarity for our shareholders on a substantial component of Yahoo's value and reaffirms the significance of our relationship with Alibaba. We look forward to continued collaboration with the Alibaba team on business initiatives as we explore joint opportunities for growth and benefit from Alibaba's future," said Ross Levinsohn, Interim CEO of Yahoo.
Of the remaining 20 percent stake, a 10 percent stake will be divested through an initial public offering of Alibaba in future. Alibaba will be required either to repurchase the stake at the IPO price or allow Yahoo to sell the shares in the IPO.
The remaining 10 percent will be disposed by Yahoo with the help of Alibaba following a customary lock-up period after the IPO, at a time that will be chosen by Yahoo.
Sunnyvale, California-based Yahoo acquired the stake in Alibaba in 2005 by paying $1 billion and giving ownership of its Chinese unit. Alibaba's other shareholders include Temasek Holdings Pte., Digital Sky Technologies and Silver Lake. Alibaba Group is the 100 percent owner of Yahoo! China.
Yahoo noted that it intends to return substantially all of the proceeds from the stake sale to shareholders, though the form of the return of capital to shareholders is yet to be finalized. However, the company raised its share buyback authorization by $5 billion.
"We look forward to delivering the proceeds of the near-term transaction to our shareholders, and to the further enhancement of value and the additional monetization in the future that this agreement enables," Yahoo CFO Timothy Morse noted.
Further, Yahoo and Alibaba also agreed to amend their existing technology and intellectual property licensing agreement. Under the amended agreement, Yahoo has granted Alibaba a transitional license to continue to operate Yahoo! China under the Yahoo brand for up to four years for an upfront lump sum royalty payment of $550 million plus additional royalty payments for up to four years.
The amended agreement will also see the restrictions on Yahoo's ability to make other investments in China terminated. Yahoo also continues to be represented on Alibaba's board of directors with the right to appoint one of four existing directors.
The current deal will reduce Yahoo's exposure to China, the second-largest economy in the world, and the struggling Internet company may find itself a takeover target.
In earlier attempts, some potential bidders were reluctant to bid for Yahoo unless it unloads its Asian holdings, the stake in Alibaba and a 35 percent stake in Yahoo Japan, making Yahoo smaller and easier to buy. Both these assets are among the most valuable for Yahoo.
YHOO closed Friday's regular trading session at $15.42, up $0.55 or 3.70% on a volume of 32.68 million shares. In the past 52-week period, the stock has been trading in a range of $11.09 to $16.99.
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