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Yahoo! strikes deal to sell Alibaba stake

by Olaf de Senerpont Domis | Published May 21, 2012 at 3:44 PM

After years of difficult negotiations, Yahoo! Inc. on Sunday announced an agreement to sell back half of its 40% stake in Alibaba Group Holding Ltd. in a deal that would net the struggling Internet company about $7.1 billion.

Sunnyvale, Calif.-based Yahoo! said the valuation of the deal will be established through upcoming Alibaba equity financings, subject to a floor valuation of the company of $35 billion. At the minimum price, the 20% stake would be purchased back by Hangzhou, China-based Alibaba for at least $6.3 billion in cash and up to $800 million in Alibaba preferred stock.

Yahoo! and Alibaba negotiated an arrangement under which the other half of Yahoo!'s stake could be sold back in stages, the companies said. Should it go public, Alibaba must buy a quarter of Yahoo!'s current stake at the initial public offering price or enable Yahoo! to sell those shares in the IPO. Also, after an Alibaba IPO, Yahoo! would have registration rights and rights to marketing support from Alibaba to help it dispose of its remaining shares after a customary lockup period. While Alibaba is expected to go public at some point, the company has not yet announced plans to do so.

Yahoo! said the agreement helps spread the exit over time, which balances short-term liquidity and returning cash to shareholders with the chance to benefit from future growth in Alibaba shares.

"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," said Yahoo! interim CEO Ross Levinsohn in a statement.

Yahoo! acquired its 40% stake in Alibaba, China's largest e-commerce company, for $1 billion in 2005.

Since then, Yahoo!'s stake has grown to represent nearly half of its own recent share value. According to a recent analysis by Bank of America Merrill Lynch, Yahoo!'s Alibaba stake, assuming a 35% tax rate, is worth roughly $7.21 per Yahoo! share.

Yahoo! said it intends to return "substantially all" of the after-tax cash proceeds from the transaction to shareholders. The company increased its buyback authorization by $5 billion, though it also said it had not finalized how it will return the capital to shareholders.

Some observers had feared that the long-running negotiations with Alibaba would be further delayed due to the recent management changes at Yahoo!. Levinsohn took the interim chief executive post May 13 after the board ousted prior CEO Scott Thompson. This followed a revelation by Yahoo! investor Third Point LLC and its chief, Dan Loeb, that Thompson's résumé contained inaccuracies about his educational degree.

While it is unlikely that Levinsohn played a major role in getting the Alibaba deal done -- much of the negotiations were likely done by Yahoo! chief financial officer Tim Morse -- the agreement is sure to cast the interim chief in a positive light among shareholders.

The companies also said they have agreed to amend a technology and intellectual property licensing agreement to lift restrictions on Yahoo!'s ability to invest in other Chinese companies and grant Alibaba a license to continue operating the Yahoo! China brand for up to four years. Alibaba will pay an up-front lump-sum royalty payment of $550 million to Yahoo!.

For financial advice, Yahoo! hired UBS Investment Bank's Janine Shelffo. Allen & Co.'s Ian Smith, and Goldman, Sachs & Co.'s John Woodruff. Leif King, Kenton King, Ed Lam, Gregg Noel, Jonathan Ko, Matthew Rosen and Eric Sensenbrenner of Skadden, Arps, Slate, Meagher & Flom LLP, as well as Karen Bellack at Weil, Gotshal & Manges LLP, provided legal counsel to Yahoo!. The company's board of directors retained Munger, Tolles & Olson LLP for outside counsel. Alibaba hired Credit Suisse Group's Boon Sim for financial advice. Its lead outside counsel came from Mark Gordon, Gordon S. Moodie, Michael Rosenblat and Jason M. Williams at Wachtell, Lipton, Rosen & Katz; Freshfields Bruckhaus Deringer LLP's Teresa Ko and David Winfield acted as Alibaba's counsel on certain financing and Hong Kong legal matters; Fenwick & West LLP's David Hayes provided intellectual property counsel.

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Olaf de Senerpont Domis

Bureau chief, West Coast; Editor, venture capital

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