The long-rumored Alibaba buyback is a done deal -- and it's infusing billions of dollars in cash into Yahoo's operating account. Alibaba Group signed a deal for what it is calling a "staged and comprehensive value realization plan" for Yahoo's 40 percent stake in the Chinese e-commerce giant.
Alibaba Group will first repurchase up to half of Yahoo's stake, or about 20 percent of Alibaba's fully diluted shares. That gives Yahoo about $6.3 billion in cash proceeds and as much as $800 million in newly issued Alibaba preferred stock.
"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."
Ongoing Royalty Payments
The agreement includes a framework for Yahoo to monetize its remaining interest in Alibaba in stages. When Alibaba goes public in the future, the company will be required to either repurchase 25 percent of Yahoo's current stake at the IPO price or allow Yahoo to sell those shares in the IPO. After an IPO, Yahoo has registration rights and rights to marketing support from Alibaba to help it dispose of the remaining shares.
Yahoo and Alibaba also have agreed to amend their existing technology and intellectual property licensing agreement. As part of the amendment, Yahoo is granting Alibaba a transitional license to continue to operate Yahoo China under the Yahoo brand for up to four years, and restrictions on Yahoo's ability to make other investments in China will be terminated.
Alibaba will make an up-front, lump-sum royalty payment of $550 million to Yahoo and continuing royalty payments for up to four years. In addition, Alibaba will license certain patents to Yahoo. Finally, Yahoo will keep a seat on Alibaba's board of directors.
Yahoo's Cash Infusion
We caught up with Greg Sterling, principal analyst at Sterling Market Intelligence, to get his take on the Yahoo-Alibaba deal. Sterling has been watching discussions about the rumored deal for the past year.
"This is a complex transaction that has been in the works in one form or another since Carol Bartz was in charge at Yahoo. Many investors saw Yahoo's stake in Alibaba as its most valuable asset, or one of them," Sterling told us.
As he sees it, a deal was inevitable. That, he explained, is because Alibaba's CEO Jack Ma wanted Yahoo out, and relations between the companies had deteriorated over the past couple of years. Alibaba at one point even considered trying to buy Yahoo with outside help.
"The $7 billion will be welcome, but it will be taxable, apparently, so Yahoo won't see the full amount. But it will nonetheless be a welcome infusion of cash," Sterling said.
Yahoo will still own half its stake in Alibaba after this deal is done. But those will also presumably be acquired in the near term, he said.
"Apparently, Yahoo is going to turn most of the money over to the shareholders as part of a share buyback program, so the company itself won't really get to use the money," Sterling said.