Alibaba buys back $7.1b stake from Yahoo as IPO looms

San Francisco: Alibaba Group Holding, China's largest e-commerce provider, agreed to repurchase about a 20 per cent stake in itself from US web portal Yahoo! for about $7.1 billion (Dh26 billion) ahead of a potential initial public offering.

Yahoo will receive at least $6.3 billion in cash and as much as $800 million in newly issued Alibaba preferred stock, the companies said in a statement yesterday. At the time of an IPO, Alibaba will be required to either buy back a quarter of Yahoo's current stake or let Yahoo sell the shares. The deal values Alibaba at about $35 billion.

Alibaba chief executive officer Jack Ma may ready an IPO following the success of last week's offering by Facebook and projected 42 per cent growth this year in China's online shopping industry. The former English teacher owns about 7.4 per cent of Alibaba Group, according to a Hong Kong stock exchange filing last month, making his stake worth $2.6 billion.

Yahoo turnaround

"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," Ma said in the statement.

Yahoo acquired about a 40 per cent stake in Hangzhou, China-based Alibaba in 2005 in exchange for $1 billion and ownership of Yahoo's Chinese operations. At the time, Yahoo had a market capitalisation of $49.2 billion, according to data compiled by Bloomberg. Its market value of $18.8 billion on May 18 is about half the value placed on Alibaba in the deal.

Alibaba's revenue rose to $2.3 billion in the year ending September 30 from $1.3 billion a year earlier, according to Yahoo's annual report in February. The Chinese company posted a profit of $268 million, compared with a loss of $10.7 million a year earlier, according to the document.

"As e-commerce in China continues to grow, Alibaba is a very attractive asset," said Duncan Clark, chairman at BDA China in Beijing, which advises technology companies. "Alibaba is in a better position now to do an IPO. The competitive pressures are increasing, and the need to reward staff and make acquisitions means it's helpful for them to list."

Alibaba has been trying to buy back the stake for more than a year and stepped up efforts in September because of improving prospects for growth and expansion beyond China. While the deal reduces Yahoo's presence in China, the world's largest internet market, it may aid turnaround efforts as the portal competes with Google and Facebook for users and advertising dollars.

"The $35 billion price tag placed on Alibaba is on the low end," said Jiong Shao, head of China strategy at Macquarie Securities in Hong Kong. "This is the most valuable asset that Yahoo has."

That valuation compares with the HK$398.8 billion ($51 billion) market capitalisation of Tencent Holdings, China's biggest internet company, and $40.3 billion for Baidu, the biggest Chinese search-engine company.

Royalty payments

Yahoo intends to return "substantially all" of the cash proceeds, after taxes, to shareholders, the company said. While the form of the returned capital hasn't been finalised, Yahoo increased its share buyback authorisation by $5 billion with the agreement, the company said.

In addition, Alibaba will make an upfront royalty payment of $550 million and continuing royalty payments for as many as four years.

The companies also agreed to amend their technology and intellectual property licensing agreement, granting Alibaba a transitional license to operate Yahoo China under the Yahoo brand for as many as four years. Also, restrictions on Yahoo's ability to make other investments in China will be terminated.