Alibaba had long expressed a desire to buy back the 43 percent chunk of the company owned by Yahoo!
After more than a year of tedious negotiations, struggling US Internet pioneer Yahoo! has agreed to sell its stake in Alibaba, China's top e-commerce player, for at least $7.1 billion, the companies announced.
The transaction will be carried out in stages.
According to the announcement, the first step calls for a repurchase by Alibaba of up to one-half of Yahoo!'s stake, or approximately 20% of Alibaba's shares.
The agreement includes substantial financial incentives for Alibaba to raise equity at a valuation higher than $35 billion.
Yahoo! would receive from Alibaba 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 firms said in a statement.
The agreement also establishes a framework for Yahoo! to sell its remaining interest in Alibaba.
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, according to the agreement.
Following the IPO, Yahoo! will have the right to dispose of its remaining shares at times of Yahoo!'s choosing.
"Today's agreement provides clarity for our shareholders on a substantial component of Yahoo!'s value and reaffirms the significance of our relationship with Alibaba," said Ross Levinsohn, Interim CEO of Yahoo!. "We look forward to continued collaboration with the Alibaba team on business initiatives as we explore joint opportunities for growth and benefit from Alibaba's future."
Alibaba's leadership was also upbeat about doors the relationship could open.
"This transaction opens a new chapter in our relationship with Yahoo!," said Jack Ma, Chairman and Chief Executive Officer of Alibaba Group. "I look forward to working with Ross Levinsohn and the Yahoo! team as Alibaba builds China's leading e-commerce company. Yahoo!'s global audience reach will provide attractive partnership opportunities for Alibaba."
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 for up to four years, while restrictions on Yahoo!'s ability to make other investments in China will be terminated.
Yahoo! stock price had climbed Friday on rumors that it was close to a multi-billion-dollar deal to sell half of its stake in Alibaba.com back to the Chinese online shopping portal.
Yahoo! shares were up nearly four percent to $15.42 on the Nasdaq exchange by the close of trading due to unconfirmed reports that the only hurdle remaining was for the boards of the companies to sign off on the deal.
Alibaba had long expressed a desire to buy back the 43 percent chunk of the company owned by Yahoo!, but repeated attempts at working out terms failed.
Cashing out the Yahoo! share of Alibaba had been part of a turnaround plan by freshly ousted Yahoo! chief executive Scott Thompson.
Thompson was forced out this month in the face of controversy about an inflated resume, resulting in a truce in a proxy war with mutinous shareholder Daniel Loeb.
As part of the settlement with Loeb's hedge fund Third Point, Ross Levinsohn became interim Yahoo! chief and Fred Amoroso took charge of the board of directors of the Sunnyvale, California-based firm.
Loeb and two of his picks -- Harry Wilson and Michael Wolf -- were given seats on the Yahoo! board.
Yahoo! has been going through a rough patch of late. It said in April that it would slash some 2,000 jobs in a purge aimed at becoming a "smaller, nimbler, more profitable" company.
The 17-year-old firm had more than 14,000 employees at the end of 2011.
Yahoo's share of overall US online ad revenue dropped from 15.7 percent in 2009 to just 9.5 percent last year, according to industry tracker eMarketer.
While the online advertising market is expected to grow 23.3 percent to $39.5 billion this year, Yahoo's share of revenues will fall further to 7.4 percent, eMarketer forecast.
As the company strived for a new identity, it saw an exodus of talent that commenced during a failed bid by technology giant Microsoft to buy Yahoo! four years ago for about $45 billion.