July 29, 2011 4:39 pm

Alibaba settles Alipay dispute with Yahoo

Alibaba Group, China’s largest e-commerce company, has settled its dispute with Yahoo and Softbank Corp, two of its largest shareholders, over the terms of the spin-off of Alipay, its former unit which provides online payment services.

The agreement guarantees Alibaba 37.5 per cent of the total equity value of Alipay or a payment of at least $2bn and up to $6bn, in case the spun-off company goes public or another ”liquidity event” takes place.

It also requires Alipay to pay Alibaba royalties for software services and 49.9 per cent of its consolidated pre-tax income and continue to service Taobao, the group’s consumer e-commerce unit, and other group businesses under preferential terms.

The deal, announced by Alibaba on Friday, ends a public spat with Yahoo after the US company accused Jack Ma, Alibaba Group founder and chairman, of transferring ownership of Alipay from the group to an entity controlled by himself without informing other shareholders.

The dispute had triggered a slide in Yahoo’s stock price, and its shares were off more than 3 per cent by early afternoon in New York on Friday as investors digested the agreement.

The case has raised a storm in China over corporate governance standards at the group, and exacerbated already sour relations between Mr Ma and Carol Bartz, Yahoo chief executive.

Yahoo’s initial announcement that Alipay had been spun off from the group without an agreement on the financial terms had raised the spectre that the US internet company’s stake in Alibaba, considered one of its most important assets, would lose value.

Mr Ma has defended himself with the argument that new Chinese government regulations on third-party payment services had required Alipay to change its ownership structure.

Mr Ma said Alipay, the market leader for third-party payment services in China, would have risked not getting a licence under the new regulatory framework rolled out by the Central Bank.

Yahoo owns 43 per cent of Alibaba, acquired for $1bn in 2005 in a deal that transferred control of Yahoo China to Alibaba.

“This is a good outcome for Yahoo and for our shareholders, as well as all the parties to this agreement,” said Carol Bartz, Yahoo chief executive.

But Eric Jackson, an activist investor whose Ironfire Capital is taking a long position on the stock, said that Yahoo shareholders were disappointed by the $6bn cap on an eventual pay-out from Alipay. He added, however, that the deal was a positive one, especially because “the doors are open for a potential IPO of Alibaba Group”.

One person familiar with the process said that reaching the agreement had “been an enormous amount of work”.

Yahoo is now expected to turn its attention to trying to unlock the value of its minority holding in Yahoo Japan, which is controlled by Softbank.

The deal highlights the opaque nature of Chinese law. Beijing’s new third-party payment services regulations allow only companies without any foreign shareholding to apply for a licence. Analysts said although Alipay is now nominally no longer a group unit, the agreement’s profit pay-out and IPO stake provisions treat it exactly like one.

The agreement only settles the most immediate disagreement between Mr Ma and Ms Bartz, however. It does nothing to address the question whether and how Yahoo could cash in on its Alibaba Group stake.

Mr Ma and Ms Bartz have had severe disagreements over the way Alibaba runs Yahoo China.

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