Yahoo clears a hurdle, sells Alibaba stake for $7.1 billion

By Melanie Lee and Soyoung Kim

SHANGHAI/NEW YORK (Reuters) - Yahoo Inc will sell as much as half of its 40 percent stake in Chinese e-commerce powerhouse Alibaba Group for $7.1 billion, ending years of fractious talks over how to extract value from its most prized asset.

Yahoo also increased its stock buyback authorization by $5 billion to $5.5 billion as a result of the deal but said it might instead opt to distribute some of the proceeds through a dividend.

The sale, announced on Monday, gives Yahoo $6.3 billion in cash and up to $800 million of new Alibaba preferred stock. After taxes, Yahoo will clear $4.2 billion.

Yahoo shares began rising Friday as word of the imminent deal spread. They increased as much as 3.8 percent in trading Monday before ending the day up 1 percent, or 16 cents, at $15.58.

Under the deal, Sunnyvale, California-based Yahoo and fellow investor Softbank Corp of Japan agreed to cap their voting rights in Alibaba at below 50 percent. Limiting outside ownership was a major motivation for Alibaba Chief Executive Jack Ma because of new Chinese regulations on foreign-controlled Internet companies, a person close to Ma said.

In a round of talks that collapsed in February, Yahoo had tried to work out a complex spin-off of Alibaba assets that wouldn't trigger a big tax bill. But that deal foundered on how much value to assign Alibaba's Taobao retail operation and on how U.S. tax authorities would treat the maneuver.

"It just got too complicated. There were too many moving parts," one Yahoo person involved in the talks said. Yahoo said the new version, while taxable, preserved the possibility of future gains because it received the right to sell another 25 percent of Yahoo's stake at the share price of an initial public offering planned by Alibaba Group. Yahoo would retain the rest.

Yahoo investors and analysts expressed relief at the compromise, which they said should allow Yahoo's new management to focus on the considerable challenges in its core business.