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Yahoo agrees to sell half of its stake in China's Alibaba for about $7.1 billion
HONG KONG (AP) ' Struggling Internet company Yahoo Inc. has secured a lifeline after agreeing to sell half of its prized stake in Chinese e-commerce group Alibaba for about $7.1 billion, with most of the cash going to shareholders.
The deal, announced Sunday in the U.S., calls for Alibaba Group to buy back half of the 40 percent stake that Yahoo owns in the Chinese company for $6.3 billion cash and up to $800 million of Alibaba preferred shares.
After paying taxes, Yahoo expects to pocket about $4.2 billion.
Chief Financial Officer Tim Morse told analysts in a Monday conference call that the company still hasn't determined how it will distribute the Alibaba proceeds after the deal closes within the next six months. For now, the company is stepping up its commitment to buy back its own slumping stock. Yahoo now intends to buy up to $5.5 billion of its shares over an unspecified period of time, up from $500 million previously.
The announcement comes after more than two years of talks held under four different CEOs as Yahoo tried to sell the Alibaba stake to raise money for its turnaround effort. Money from the sale will give Yahoo the financial firepower to return cash to disgruntled shareholders, many of whom are still upset after it squandered an opportunity to sell itself to Microsoft Corp. in May 2008 for $33 per share, or $47.5 billion. Yahoo's stock hasn't traded above $20 since September 2008.
The Alibaba agreement gives Yahoo the rare chance to crow about something that went right after years of management missteps and corporate disarray that has depressed its financial results and stock price. Yahoo's latest crisis cropped up earlier this month when it was revealed the official biography of recently hired CEO Scott Thompson included misinformation about his academic background. The discrepancy culminated in Thompson's abrupt departure last week.
Yahoo is reaping a huge return from the $1 billion investment that it made in Alibaba in 2005. Billions more in cash is expected to flow to Yahoo when it sells another 10 percent of its stake in Alibaba's IPO ' an event likely to occur by the end of 2015 under the terms of the agreement between the two companies.
"This investment has been a home run to date and our objective is to maximize its value for Yahoo shareholders," Morse said during Monday's conference call.
Yahoo shares gained 18 cents to $15.60 in morning trading on Monday.
The deal, which closes in six months, is good for Yahoo because the company gets a "wad of cash" but still has exposure to fast-growing China, said Napoleon Biggs, head of digital integration at public relations firm Fleishman-Hillard Asia Pacific.
"China for them was like a sore tooth," said Biggs, who has worked in the China Internet and media industry since 1997.
Yahoo's interim CEO Ross Levinsohn said the stake sale provides clarity for Yahoo shareholders. Levinsohn stepped into the CEO role after Thompson stepped down.
Thompson and Morse had been working on a complex deal earlier this year that would have allowed Yahoo to escape taxes, but it fell apart.
Under the new deal, Alibaba Group will have to buy back another 10 percent of Yahoo's stake when it goes public or help Yahoo sell those shares in its IPO. Once Alibaba is public, Yahoo could then sell the rest of its stake in the open market.
The deal gives Alibaba an incentive to complete its IPO before 2016.
Alibaba Chairman and CEO Jack Ma said the deal establishes a "balanced ownership structure that enables Alibaba to take our business to the next level as a public company in the future."
Hangzhou, China-based Alibaba started out as a business-to-business website linking factories in China to buyers around the world. It also operates Taobao.com, the country's version of eBay, and TMall, which brand owners can use to sell directly to consumers.
The relationship between Yahoo and Alibaba began amicably but deteriorated as the Yahoo went through successive CEOs trying to engineer a deal. They also feuded last year after Alibaba spun off its payment service, Alipay, but failed to disclose it right away, rattling Yahoo investors.
Yahoo said at the time the change was necessary because Beijing would only license an electronic payment service wholly owned by Chinese citizens.
By eventually reducing Alibaba's foreign ownership to a minority level, that could help the company if it plans to expand further into e-payments, Biggs said.
Biggs said Ma may be thinking that "I've got the businesses, the consumers, I've got the brands. All I need now is to grow my payment mechanisms."
After the $7.1 billion transaction is completed, Yahoo and Japan's Softbank, which owns about 30 percent of Alibaba, will hold about 50 percent of Alibaba. But the two companies have agreed to cap their collective shareholder voting rights at less than 50 percent, according to the Alizila blog post.
That means Ma will be in the driving seat for any company decisions.
Yahoo and Alibaba also agreed to modify their technology and intellectual property licensing agreements.
Under the changes, Yahoo will grant Alibaba a license to continue using the Yahoo China brand for up to four years. Alibaba will pay Yahoo $550 million and make royalty payments over that period. Yahoo will no longer be restricted from making other investments in China.
Alibaba is in the process of taking Hong Kong-listed unit Alibaba.com private. Shareholders will vote Friday on whether the company should buy back the 27 percent it doesn't already own.
Follow Kelvin Chan at twitter.com/chanman