China's CIC Eyes up to $2 Billion Stake in Alibaba Group: Sources

May 24, 2012 11:27 AM EDT

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(Reuters) - Sovereign wealth fund China Investment Corp (CIC) is in advanced talks to buy an up to $2 billion stake in Alibaba Group, sources told Reuters, as the Chinese e-commerce powerhouse looks to secure the last of the funding it needs to buy back part of its stake from Yahoo Inc.

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The involvement of CIC, China's giant sovereign wealth fund which manages around $410 billion in assets, underlines the significance of the deal Alibaba has struck with Yahoo, which returns voting control back to founder Jack Ma.

It also emphasises the potential value of the company. Bankers said Alibaba Group could have a value of about $100 billion over the next 3 to 4 years, and incentives in the deal encourage Alibaba to list by 2015. That IPO exit is attracting investors to the company.

Yahoo and Alibaba struck a deal last week whereby the Chinese company agreed to buy back up to half of the 40 percent stake in itself held by Yahoo for $7.1 billion, valuing Alibaba at $35 billion.

Alibaba is raising $4.6 billion of that target through an issue of preferred shares, bank loans and the sale of a stake to existing shareholders - Singapore state investor Temasek Holdings Pvt Ltd and DST Global. Another $2.5 billion in cash would allow Alibaba to fund the full $7.1 billion purchase.

Sources with direct knowledge of the matter said CIC's $2 billion purchase of the Alibaba stake would help the e-commerce company complete its funding for the Yahoo purchase.

Alibaba is also in talks with private equity firms that would assist in funding the remaining $500 million, sources said, including Bain Capital, Blackstone Group LP, and Hony Capital.

Under the deal, Sunnyvale, California-based Yahoo and fellow investor Softbank Corp of Japan agreed to cap their voting rights in Alibaba at below 50 percent. Limiting outside ownership was a major motivation for Alibaba Chief Executive Jack Ma, a person close to Ma said.

In a round of talks that collapsed in February, Yahoo had tried to work out a complex spin-off of Alibaba assets that wouldn't trigger a big tax bill. But that deal foundered on how much value to assign Alibaba's Taobao retail operation and on how U.S. tax authorities would treat the maneuver.

Taobao, Alibaba's crown jewel and virtual cash machine, accounted for almost two-thirds of $2.8 billion group revenue in 2011. But it has come under fire over fake items sold on its platform, and was last year placed on the United States Trade Representative's (USTR) notorious markets blacklist for offering a wide range of goods that infringed copyrights.

The sources declined to be named because the discussions were private. Alibaba, Blackstone, CIC and Hony all declined comment. Bain could not immediately be reached for comment.

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