Yahoo! selling 50% of Alibaba in $7.1bn divorce

Yahoo! and Alibaba are finally beginning their troubled divorce, with the Chinese e-commerce firm buying out half of Yahoo!'s stake in a $7.1bn deal valuing the company at $35bn overall. Meanwhile, options for Yahoo! to shed its remaining shares are also on the table, with Alibaba required to buy – or allow Yahoo! to sell off – another quarter when it floats for IPO, while Alibaba will also be able to operate Yahoo! China under its partner's branding for a further four years.

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That "transitional license" allows Alibaba to continue to use the Yahoo! branding, but also allows Yahoo! to make other investments in the Chinese market. In return, Alibaba will pay $550m and ongoing royalty payments, as well as license certain undisclosed patents to Yahoo!

" Yahoo! intends to return substantially all of the after-tax cash proceeds to shareholders following the closing of the transaction" the company said in a statement on the deal. "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."

Interestingly, Alibaba apparently does not yet have the necessary funding to complete the initial buy-out, which amounts to roughly 20-percent of the firm overall. If it cannot achieve the full financing – amounting to at least $6.3bn in cash, with the remainder in up to $800m of newly-issued preferred stock – it will be required to buy "at least" 10-percent according to the terms of the deal, rising to up to one half of Yahoo!'s stake if the financing comes through. Alibaba has said it expects to use a combination of cash, debt, equity and equity-linked financing to fund the change in ownership, and the deal is expected to close within six months.

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Further down the line, at the time of an Alibaba IPO, Yahoo! will be permitted to either sell a quarter of its shares back to the company or publicly. Following the IPO, Yahoo! will be able to sell off its remaining shares, complete with mandatory marketing support from Alibaba.

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