Struggling US Internet pioneer Yahoo has agreed to sell its stake in Alibaba, China's top ecommerce player, for at least $7.1 billion.
This follows over a year of tedious negotiations,
The deal will be carried out in stages. The first step calls for a repurchase by Alibaba of up to one-half of Yahoo's stake, about 20% of Alibaba's shares.
The agreement includes substantial financial incentives for Alibaba to raise equity at a valuation higher than $35 billion.
Yahoo would receive from Alibaba about $7.1 billion, composed of at least $6.3 billion in cash proceeds and up to $800m in newly-issued Alibaba preferred stock, the firms said in a statement.
The agreement also establishes a framework for Yahoo to sell its remaining interest in Alibaba. 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, according to the agreement.
After the IPO, Yahoo will have the right to dispose of its remaining shares at times of Yahoo's choosing.
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 for up to four years, while restrictions on Yahoo's ability to make other investments in China will be terminated.
Yahoo stock price had climbed on Friday on rumours that it was close to a multi-billion-dollar deal to sell half of its stake in Alibaba.com back to the Chinese online shopping portal. Yahoo shares were up nearly 4% to $15.42 on the Nasdaq exchange by the close of trading due to unconfirmed reports that the only hurdle remaining was for the boards of the companies to sign off on the deal.
Alibaba had long expressed a desire to buy back the 43% chunk of the company owned by Yahoo, but repeated attempts at working out terms failed.
Cashing out the Yahoo share of Alibaba had been part of a turnaround plan by freshly ousted Yahoo chief executive Scott Thompson. Thompson was forced out this month in the face of controversy about an inflated CV, resulting in a truce in a proxy war with mutinous shareholder Daniel Loeb.
As part of the settlement with Loeb's hedge fund Third Point, Ross Levinsohn became interim Yahoo chief and Fred Amoroso took charge of the board of directors of the California-based firm. Loeb and two of his picks - Harry Wilson and Michael Wolf - were given seats on the Yahoo board.
Yahoo has been going through a rough patch of late. It said in April that it would slash some 2,000 jobs in a purge aimed at becoming a "smaller, nimbler, more profitable" company. The 17-year-old firm had more than 14,000 employees at the end of 2011.
Yahoo's share of overall US online ad revenue dropped from 15.7% in 2009 to just 9.5% last year, according to industry tracker eMarketer. While the online advertising market is expected to grow 23.3% to $39.5 billion this year, Yahoo's share of revenues will fall further to 7.4%, eMarketer forecast.
As the company strived for a new identity, it saw an exodus of talent that commenced during a failed bid by technology giant Microsoft to buy Yahoo four years ago for about $45 billion.
