Yahoo Inc. said on Sunday that it has struck a deal with Alibaba Group Holding Ltd. to sell up to half of its current holdings in the Chinese Internet major, with plans to eventually divest the balance shares.

Under the deal, Alibaba would repurchase up to half of Yahoo's stake - about 20% of the company - at the minimum price allowed in the agreement. Yahoo is expected to receive US$7.1bn, consisting of US$6.3bn cash and US$800mn in new Alibaba preferred shares.

Yahoo would then be able to sell another 10% of the company if and when Alibaba lists publicly. In the event of an Alibaba initial public offering (IPO), Yahoo would be able to sell of the final 10% of the company after a lock-up period.

Currently, only Alibaba Group's subsidiary Alibaba.com Ltd. is publicly traded. Its shares were suspended in Hong Kong ahead of the announcement.

Yahoo also said that it would use all of the sale's post-tax proceeds to repurchase its own shares, with the board already having approved a US$5bn increase to the firm's current buyback program.

Yahoo bought 40% stake in Alibaba for ~US$1bn in 2005.

Japan's Softbank Corp owns ~30% of Alibaba. Chinese Internet entrepreneur Jack Ma owns close to 7.5% of Alibaba.

In addition to the share repurchase, Yahoo and Alibaba will amend their existing technology and intellectual property licensing agreement. Alibaba will continue to operate Yahoo China under the Yahoo brand for up to four years.

Yahoo will be freed from restrictions on it making other investments in China. Alibaba will make an upfront lump sum royalty payment of US$550mn to Yahoo and keep paying royalties for up to four years. Alibaba will license certain patents to Yahoo.

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