Yahoo Inc is in advanced talks to exit its joint venture in Japan with Softbank Corp, a move that could lead it to focus on reaching a decision on its China assets.
A deal to transfer Yahoo's 35 percent stake in Yahoo Japan to Softbank, which already controls 42 percent of the unit, could come within a few weeks, people with knowledge of the discussions said. The public value of the stake is about $8 billion.
Shares of Yahoo Japan jumped 4.3 percent in Tokyo on expectations Softbank, Japan's No.3 mobile phone operator, would pay a premium for the stake. Softbank's stock slipped 2.4 percent on worries over how it would finance the deal.
"If finalized, it means Yahoo Japan will completely be under Softbank's umbrella," said Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan. "Yahoo Japan will likely strengthen its Internet and cell phone content businesses so there will likely be synergy."
A straightforward sale is unlikely for tax reasons and the parties are exploring other structures, these people said. A deal has not yet been reached and could yet fall apart.
When asked for comment, a spokesman for Softbank said there was "no truth" to claims that Yahoo was planning to sell its stake back to Softbank, but declined to comment on discussions.
If a deal is reached, Yahoo is likely to turn its attention to China, where it owns an estimated 40 percent stake in prominent Internet company, Alibaba Group, the parent company of Alibaba.com, these people said. It was not immediately clear what Yahoo wants to do with its Alibaba stake.
There have been no recent negotiations between the two companies after an Alibaba spokesman said last September it had "moved on" from buying back Yahoo's stake.
The intermingled ownership of Alibaba, and Yahoo Japan complicates the discussions. Softbank, which is more than a fifth owned by its founder Masayoshi Son, also owns a stake in Alibaba.
"There is a triangular relationship between the three parties. Anything that happens with Alibaba has to involve all three parties," one of the sources said.
The talks come with Yahoo Chief Executive Carol Bartz under pressure to turn around the once mighty internet company that has fallen behind both Google and Facebook. A much hoped-for turnaround in its Internet advertising following a splashy search tie-up with Microsoft Corp has yet to materialize.
A deal for Yahoo's stake in the mature Japanese market could bring a cash infusion that could be viewed favorably by investors, analysts have said.
Leaving the fast-growing and massive China market would be more controversial. Western internet companies have largely failed to crack the tough regulatory regime and home-grown rivals such as Baidu Inc.
The ongoing negotiation between Softbank and Yahoo have turned up a number of potential deal structures, the sources said. To avoid paying a 38 percent tax bill, Yahoo is against a straight sale of the stake.
Tax-free options include an asset swap, where Softbank would acquire a stake in Yahoo in return for Yahoo's Yahoo Japan stake. Another option is for Yahoo to set up a tracking stock giving its shareholders the ability to sell off the stock.
A plan to set up a tracking stock, which does not require Son's approval, is seen as negotiating leverage for Yahoo. Such a move would likely depress the valuation of Yahoo Japan shares, one source said, because of shareholder dilution.
"(Yahoo) must be using the threat of a tracking stock to threaten a stock swap deal, which would be much more preferable for Yahoo," said the source.
Over the past few weeks Yahoo executives have publicly discussed the likelihood of an exit from Japan, a market it entered in 1996 with Softbank's help. The two sides are seeking "tax efficient options and working with our partners so it works out well," Yahoo Chief Financial Officer Tim Morse said at a recent investors conference.
UBS is advising Yahoo. Boutique investment bank Raine Group, founded by two Wall Street bankers, Joseph Ravitch, a former partner at Goldman Sachs, and Jeffrey A. Sine, a former senior banker at UBS. Softbank is an investor in the Raine Group.
Son, an outspoken technology entrepreneur who has achieved stronger growth than his two bigger mobile phone rivals in Japan through an exclusive network agreement for Apple Inc's iPhone, has openly attacked Yahoo's track record as an innovator and its approach to international markets.
The relationship between Son and the straight talking Bartz frayed after Yahoo Japan replaced its search advertising partner with Google last year.
Yahoo, SoftBank, Alibaba and UBS declined to comment. Raine Group's founders were not immediately available for comment.