Struggling Internet firm Yahoo! Inc has said it will sell half of its stake in Alibaba Group back to the Chinese e-commerce company for $7.1 billion.

Yahoo!, which bought 40 per cent stake in Alibaba Group in 2005 for about $1 billion, will sell 20 per cent of its holding to the Chinese firm.

In an agreement reached yesterday, Yahoo! said it would receive $7.1 billion from Alibaba composed of at least $6.3 billion in cash and up to $800 million in newly issued Alibaba preferred stock.

As part of the deal, the company would sell the remainder of its Alibaba stake in stages.

“The deal provides for a staged exit over time (to Yahoo), balancing near-term liquidity and return of cash to shareholders with the opportunity to participate in future value appreciation of Alibaba,” Yahoo! said in a statement.

The future monetisation would happen when Alibaba goes public.

At the time of the IPO, 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.

“...agreement provides clarity for our shareholders on a substantial component of Yahoo’s value and reaffirms the significance of our relationship with Alibaba,” Yahoo! Interim CEO, Mr Ross Levinsohn, said.

“The transaction will establish a balanced ownership structure that enables Alibaba to take our business to the next level as a public company in the future.” Alibaba Group Chairman and CEO, Mr Jack Ma, said.

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