Yahoo and Alibaba have entered into a definitive agreement for a staged and comprehensive value realization plan for Yahoo’s stake in Alibaba.
The first step is the repurchase by Alibaba of up to one-half of Yahoo’s stake, or approximately 20% of Alibaba’s fully-diluted shares. The purchase price will be based on a valuation of Alibaba to be established through equity financings that Alibaba intends to undertake to finance the transaction, subject to a floor valuation of approximately $35 billion. The agreement includes substantial financial incentives for Alibaba to raise the additional equity at a valuation higher than $35 billion. At the minimum price and assuming the initial repurchase of the full 20% stake, Yahoo would receive from Alibaba consideration of approximately $7.1 billion, composed of at least $6.3 billion in cash proceeds and up to $800 million in newly-issued Alibaba preferred stock.
The agreement also establishes a framework for Yahoo to monetize its remaining interest in Alibaba in stages. 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. Second, following such an IPO, Yahoo has registration rights and rights to marketing support from Alibaba to enable Yahoo! to dispose of its remaining shares, at times of Yahoo’s choosing following a customary lock-up period.
This agreement is a result of extensive discussions between the two parties and a comprehensive review of both taxable and tax-efficient alternatives. Yahoo! and Alibaba believe this agreement to be the best path to align incentives and maximize value for shareholders of both companies and it paves the way for Alibaba to achieve future public market liquidity for all of Alibaba’s shareholders. For Yahoo!, the agreement provides for a staged exit over time, balancing near-term liquidity and return of cash to shareholders with the opportunity to participate in future value appreciation of Alibaba.
Jack Ma (Chairman and CEO, Alibaba Group): Yahoo’s global audience reach will provide attractive partnership opportunities for Alibaba to explore markets outside of China. The transaction will establish a balanced ownership structure that enables Alibaba to take our business to the next level as a public company in the future.
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 under the Yahoo brand for up to four years, while restrictions on Yahoo’s ability to make other investments in China will be terminated.
Alibaba will make an upfront 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. Upon closing of the repurchase transaction, the Alibaba shareholders’ agreement will be amended so that the parties’ respective rights will be commensurate with the parties’ post-closing level of ownership in Alibaba. Yahoo will continue to be represented on Alibaba’s board of directors with the right to appoint one of four existing directors.
Yahoo says it intends to return substantially all of the after-tax cash proceeds to shareholders following the closing of the transaction. 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 $5 billion concurrently with this transaction.
The transaction is subject to customary closing conditions. Alibaba will be required to close the repurchase with respect to at least one-quarter of Yahoo’s current stake in Alibaba regardless of the amount of financing raised, and up to one-half of Yahoo’s current stake if it obtains the requisite financing. Alibaba intends to finance the repurchase through a combination of its own cash resources, debt, equity and equity-linked financing. The transaction is expected to close within approximately six months.
UBS Investment Bank acted as lead financial advisor to Yahoo and Allen & Company and Goldman Sachs also served as financial advisors. Skadden, Arps, Slate, Meagher & Flom acted as lead legal counsel to Yahoo and Weil, Gotshal & Manges also acted as legal counsel. Munger, Tolles, & Olson acted as legal counsel to the Yahoo board. Credit Suisse acted as lead financial advisor to Alibaba and Wachtell, Lipton, Rosen & Katz acted as lead legal counsel to Alibaba. Freshfields Bruckhaus Deringer acted as counsel to Alibaba on certain financing and Hong Kong legal matters and Fenwick & West acted as counsel to Alibaba on intellectual property matters.