Exclusive: Eyeing Yahoo deal, Alibaba may take HK unit private

HONG KONG Fri Feb 10, 2012 10:45pm IST

1 of 3. A man walks past a logo of Alibaba (China) Technology Co. Ltd at its headquarters on the outskirts of Hangzhou, Zhejiang province in this August 11, 2011, file photo.

Credit: Reuters/Steven Shi

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HONG KONG (Reuters) - Chinese e-commerce group Alibaba plans to take its Hong Kong-listed unit private, two sources familiar with the matter said, as part of a complex deal that would strengthen founder Jack Ma's control and give key stakeholder Yahoo cash and a direct stake in one of Alibaba's operating businesses.

Alibaba Group, the online business-to-business group set up in 1999 by former tour guide and now billionaire Ma, plans to buy back most of the 40 percent stake in it that Yahoo purchased for about $1 billion in 2005.

Under the plans being discussed, Alibaba Group would use bank loans and cash plus an asset swap to buy back about a 25 percent stake, leaving Yahoo holding 15 percent, the sources said. The U.S. group's 40 percent holding is worth an estimated $13 billion to $14 billion, based on recent deal valuations.

Alibaba Group, one of the three leading players in the world's largest Internet market, plans to pay a third of the consideration through a stake in one of its operating assets -- making a deal tax-free for Yahoo -- and the rest, around $6 billion, in cash, the sources said. It is looking to raise a loan of about $3 billion to help fund the deal.

The sources said taking Alibaba.com private was just one of the proposals under discussion and was not a pre-condition of any Yahoo deal. Any final agreement could be several weeks away, they added.

Alibaba Group's plans are part of an overall deal being discussed by Yahoo, an Internet pioneer under pressure from investors to turn around a lackluster performance. Last month, Yahoo appointed Scott Thompson as CEO to replace Carol Bartz, who was fired in September, and co-founder Jerry Yang quit the company.

Yahoo shareholders are frustrated at stakeholders' apparent indecision over how to handle investments in Alibaba and other Asian assets.

"Alibaba.com's share price has been quite bumpy since its listing," said Wendy Huang, head of regional Internet and media research at RBS in Hong Kong. "Probably taking it private will make it more flexible for the group to do the transformation that it's going through."

Trading in Alibaba.com shares was halted on Thursday pending an announcement regarding its parent. Alibaba.com, which is about 73 percent-owned by Alibaba Group, has a market value of nearly $6 billion, making the remaining stake in it worth around $1.6 billion.

Alibaba.com is the most likely operating unit in which Yahoo may be offered a stake, one of the sources said. Both parties have an understanding on this arrangement, but have not signed any formal deal yet, the source added.

Other Alibaba Group assets that could be used in a swap deal with Yahoo could include Taobao.com, often dubbed "China's e-Bay", Taomall, Yahoo (China) and Alipay, an e-payment business, sources said, adding Yahoo would get to choose which assets it wants.

The sources requested anonymity because the discussions were private. An Alibaba Group spokesman declined to comment. A representative for Yahoo declined to comment.

Sources previously told Reuters that under a "cash rich split" plan being discussed, Yahoo would effectively transfer most of its 40 percent Alibaba stake back to the Chinese company, and all of its more than one-third stake in Yahoo Japan to Softbank Corp in return for cash and assets.

The idea behind the deal is twofold for Yahoo, sources previously said. Most of the company's value is locked up in its Alibaba and Yahoo Japan stakes, so selling them down would simplify its ownership structure. That in turn would make it easier for potential buyers to value Yahoo's U.S. operations and provide for a cleaner transaction should one come to fruition.

Secondly, Yahoo can use the more than $6 billion in cash it will generate from the two deals to return money to shareholders in the form of a dividend or share buyback. Yahoo's shareholders have been clamoring for some kind of liquidity event since the company turned down Microsoft's $44 billion takeover offer four years ago this month.

Yahoo shares were up 1.8 percent at $16.29 in midday Nasdaq trading.

Shares in Softbank jumped more than 4 percent to a 5-week high of 2,319 yen on Friday. Softbank has an indirect stake of 31 percent to 32 percent in Alibaba.com as it holds close to a third of Alibaba Group and owns 58 percent of Alibaba Japan.

Yahoo had also entertained separate proposals from private equity firms TPG and Silver Lake about minority investments in the company, but those offers fell short of Yahoo's expectations.

(Additional reporting by Stephen Aldred, Kazunori Takada, Saeed Azhar, Melanie Lee, Chyen Yee Lee and Alexei Oreskovic; Editing by Muralikumar Anantharaman, Ian Geoghegan and Lisa Von Ahn)