Yahoo, Alibaba and Softbank reach agreement on Alipay

The deal ensures that the value of Alipay stays within the Alibaba Group, Yahoo's CFO said

Alibaba Group has reached an agreement with Yahoo and Softbank over Alipay, the payment platform behind China's largest e-commerce market, Taobao.

Alipay had become a bone of contention between Alibaba Group and Yahoo, which holds about a 40 per cent stake in the group. Softbank also holds a stake in Alibaba Group as well as in Yahoo.

Alibaba spun off Alipay to a Chinese company in order to satisfy a new regulation in China that requires all online payment services be Chinese-owned if they come from nonfinancial institutions. It is now controlled by a company owned by Alibaba CEO Jack Ma.

Yahoo claims it was never informed of the deal, which started in August 2010, and feared for its investment in Alibaba Group, which is now worth more than US$2 billion. Yahoo feared the spinoff might devalue its overall stake in Alibaba, which has been growing.

In 2005, Yahoo bought a $1 billion stake when it transferred its brand and services to Alibaba Group. But the two companies have been at odds since then and at one time discussed Yahoo selling back its stake.

The deal announced on Friday ensures that Alibaba is appropriately compensated for Alipay, which could at some point in the future be sold or subject to an IPO (initial public offering), said Tim Morse, chief financial officer for Yahoo, during a conference call.

Morse said the "complexity of the arrangement can't be underestimated." Under the deal, Alibaba Group will receive a minimum of $2 billion or a maximum of $6 billion if Alipay is liquidated. The exact figure will be calculated by multiplying the total equity value of Alipay by 37.5 per cent, within range of the lower and upper limits.

The deal means that the vast majority of the value of Alipay will be preserved within Alibaba, Morse said.

Taobao runs its online Taobao Mall where businesses sell goods to consumers and also the Taobao Marketplace where consumers can sell good to each other. Alipay powers the transactions on the Taobao Mall. To attract merchants, Taobao does not charge them a payment processing fee and instead directly pays Alipay for the service.

For now, most of Alipay's transactions are on Taobao's properties, but plans are for it to expand and power other online marketplaces. That market, however, is "nascent," said Joe Tsai, CFO for Alibaba, accounting for less than $60 million in revenue last year.

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Jeremy Kirk

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