Alibaba seals deal for Yahoo buy-back

PUBLISHED : Tuesday, 22 May, 2012, 12:00am
UPDATED : Tuesday, 22 May, 2012, 12:00am


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Alibaba Group has been put on a path to an initial public offering after the mainland e-commerce giant yesterday reached a share buy-back agreement with Yahoo, the struggling internet pioneer.

A source close to the Yahoo transaction said there were a couple of incentives in the deal that may make it attractive for Alibaba's management team to consider an IPO by late 2015.

Hangzhou-based Alibaba, which is the parent of Hong Kong-listed, will purchase in stages Yahoo's 40 per cent stake in the company. It will initially buy half of that shareholding for about US$7.1 billion, composed of at least US$6.3 billion in cash and up to US$800 million in new Alibaba preferred stock.

Their deal also requires Alibaba to make an upfront, lump sum royalty payment of US$550 million to Yahoo and continue royalty payments for up to four years. That arrangement is for Alibaba's licence to continue operating Yahoo China under the US internet firm's brand.

The source said one incentive for Alibaba to go public was that its right to purchase the third remaining tranche, or 10 per cent, of Yahoo's shares in the company would expire in December 2015.

If and when it decided to conduct an IPO, Alibaba will be able to either buy back that remaining Yahoo stake at the IPO price or allow Yahoo to sell those shares during the public offering.

Another incentive is that the licensing payments to Yahoo will stop when Alibaba goes public.

But Alibaba spokesman John Spelich yesterday said: 'We have no plans, no commitment and no timetable for any IPO.'

Qi Jianzhe, an analyst at mainland internet market research firm Analysys International, said Alibaba was not expected to step up its pace to go public.

'Alibaba Group will first focus on restructuring its business,' Qi said. 'The company, for example, has committed to carry out a complete transformation of its business-to-business e-commerce operations [run by], upgrade its online retail units [Taobao Marketplace, TMall and eTao] and develop its capabilities in mobile e-commerce,' Qi said.

The deal that Alibaba struck with Yahoo valued the mainland company at about US$35 billion, which is close to the valuation calculated by an investor group when it paid Alibaba employees US$1.6 billion to acquire a 5 per cent stake in the firm. That group was led by DST Global, Silver Lake and Chinese private equity firm Yunfeng Capital.

'This transaction opens a new chapter in our relationship with Yahoo,' said Jack Ma Yun, the chairman and chief executive of Alibaba. 'Yahoo's global audience reach will provide attractive partnership opportunities for Alibaba to explore markets outside of China.

'The transaction will establish a balanced ownership structure that enables Alibaba to take our business to the next level as a public company in the future.'

In addition to the share buy-back arrangement, Alibaba will license certain patents to Yahoo and terminate restrictions on the US firm's ability to make other investments on the mainland.

Funds for Alibaba's share repurchase scheme will be generated through a combination of its own cash resources, debt, equity and equity-linked financing. The transaction is expected to close within six months. Yahoo intends to return substantially all of the after-tax cash proceeds to its shareholders.

'There is a line of people who are willing to give Alibaba money,' the source close to the Yahoo deal said.

Alibaba wants to raise more than US$2 billion from existing shareholders to help fund the share repurchase, according to a Bloomberg report.

The deal puts an end to a series of failed share buy-back talks between the two companies over more than three years. Negotiations for Yahoo to sell back most of its stake in Alibaba and in Softbank-controlled Yahoo Japan collapsed in February.