Alibaba Buys Back Stake From Yahoo! For $7.1 Billion

Posted May 21, 2012

Yahoo! is selling half of their stake in the Alibaba Group back to them for $7.1 billion and most of the sales proceeds will be to their own shareholders. The discussions between Alibaba and Yahoo! has been ongoing for the last 2 years. Yahoo! bought 40% in Alibaba for $1 billion in 2005. Yahoo! will sell half of that stake in Alibaba for at least $6.3 billion in cash and up to $800 million in new Alibaba preferred stock.

Yahoo! said that they would return “substantially all” of the after-tax cash proceeds from the deal to its stockholders. Yahoo! has increased a planned share buyback by $5 billion. Analysts believe that Yahoo!’s value is tied up in their Asian assets and selling them down would simplify their ownership structure.

This transaction values Alibaba at $35 billion. Another part of the deal is that there are now medium-term incentives put in place for Alibaba to pursue a public offering. Alibaba has been planning on going public for some time now, but this puts more pressure for it.

Below is a press release from the two companies:

Yahoo! and Alibaba Reach Agreement on Comprehensive Plan for Alibaba Stake Agreement Realizes Significant Value, Immediate Liquidity and Path to Future Monetization

Yahoo! Board Increases Share Repurchase Plan by US$5 Billion

May 20, 2012 ? Sunnyvale, California and Hangzhou, China ? Yahoo! Inc. (NASDAQ: YHOO) and Alibaba Group Holding Limited today announced they have entered into a definitive agreement for a staged and comprehensive value realization plan for Yahoo!?s stake in Alibaba.

The first step is the repurchase by Alibaba of up to one-half of Yahoo!?s stake, or approximately 20% of Alibaba?s fully-diluted shares. The purchase price will be based on a valuation of Alibaba to be established through equity financings that Alibaba intends to undertake to finance the transaction, subject to a floor valuation of approximately US$35 billion. The agreement includes substantial financial incentives for Alibaba to raise the additional equity at a valuation higher than US$35 billion. At the minimum price and assuming the initial repurchase of the full 20% stake, Yahoo! would receive from Alibaba consideration of approximately US$7.1 billion, composed of at least US$6.3 billion in cash proceeds and up to US$800 million in newly-issued Alibaba preferred stock.

The agreement also establishes a framework for Yahoo! to monetize its remaining interest in Alibaba in stages. First, at the time of an initial public offering (IPO) of Alibaba in the future, Alibaba will be required either to repurchase one-quarter of Yahoo!?s current stake at the IPO price or allow Yahoo! to sell those shares in the IPO. Second, following such an IPO, Yahoo! has registration rights and rights to marketing support from Alibaba to enable Yahoo! to dispose of its remaining shares, at times of Yahoo!?s choosing following a customary lock-up period.

This agreement is a result of extensive discussions between the two parties and a comprehensive review of both taxable and tax-efficient alternatives. Yahoo! and Alibaba believe this agreement to be the best path to align incentives and maximize value for shareholders of both companies and it paves the way for Alibaba to achieve future public market liquidity for all of Alibaba?s shareholders. For Yahoo!, the agreement provides for a staged exit over time, balancing near-term liquidity and return of cash to shareholders with the opportunity to participate in future value appreciation of Alibaba.

?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 Ross Levinsohn, Interim CEO of Yahoo!. ?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. I want to thank Jack Ma, Joe Tsai and the Alibaba team, as well as Tim Morse, Michael Callahan and our Yahoo! team for their dedication in achieving this successful outcome.?

?This transaction opens a new chapter in our relationship with Yahoo!,? said Jack Ma, Chairman and Chief Executive Officer of Alibaba Group. ?I look forward to working with Ross Levinsohn and the Yahoo! team as Alibaba builds China?s leading e-commerce company. 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.?

?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,? said Timothy R. Morse, Executive Vice President and Chief Financial Officer of Yahoo!.

In addition to the share repurchase, the companies have also agreed to amend their existing technology and intellectual property licensing agreement. Among other things, this amendment will result in Yahoo! granting Alibaba a transitional license to continue to operate Yahoo! China under the Yahoo! brand for up to four years, while restrictions on Yahoo!?s ability to make other investments in China will be terminated. Alibaba will make an upfront lump sum royalty payment of US$550 million to Yahoo! and continuing royalty payments for up to four years. In addition, Alibaba will license certain patents to Yahoo!. Upon closing of the repurchase transaction, the Alibaba shareholders? agreement will be amended so that the parties? respective rights will be commensurate with the parties? post-closing level of ownership in Alibaba. Yahoo! will continue to be represented on Alibaba?s board of directors with the right to appoint one of four existing directors.

Yahoo! intends to return substantially all of the after-tax cash proceeds to shareholders following the closing of the transaction. While the form of the return of capital to shareholders has not yet been finalized, Yahoo!?s board has increased Yahoo!?s share buyback authorization by US $5 billion concurrently with this transaction.

The transaction is subject to customary closing conditions. Alibaba will be required to close the repurchase with respect to at least one-quarter of Yahoo!?s current stake in Alibaba regardless of the amount of financing raised, and up to one-half of Yahoo!?s current stake if it obtains the requisite financing. Alibaba intends to finance the repurchase through a combination of its own cash resources, debt, equity and equity-linked financing. The transaction is expected to close within approximately six months.

UBS Investment Bank acted as lead financial advisor to Yahoo! and Allen & Company LLC and Goldman Sachs & Co. also served as financial advisors. Skadden, Arps, Slate, Meagher & Flom LLP acted as lead legal counsel to Yahoo! and Weil, Gotshal & Manges LLP also acted as legal counsel. Munger, Tolles, & Olson LLP acted as legal counsel to the Yahoo! Board of Directors. Credit Suisse acted as lead financial advisor to Alibaba and Wachtell, Lipton, Rosen & Katz acted as lead legal counsel to Alibaba. Freshfields Bruckhaus Deringer LLP acted as counsel to Alibaba on certain financing and Hong Kong legal matters and Fenwick & West LLP acted as counsel to Alibaba on intellectual property matters.