Chinese Internet entrepreneur Jack Ma is buying back up to half of a 40-per cent stake in his Alibaba Group from Yahoo Inc for $7.1 billion, in a deal that moves the Chinese e-commerce leader closer to a public listing.

Under the agreement, Yahoo will sell half of its stake in Alibaba for at least $6.3 billion in cash and up to $800 million in new Alibaba preferred stock. The deal, announced in a joint statement Monday, caps years of talks between the two firms over Alibaba reclaiming some or all of the 40 per cent stake that Yahoo bought for about $1 billion in 2005.

A source familiar with the deal said Yahoo built in incentives for Alibaba, which operates the popular Chinese online marketplace Taobao, to hold an initial public offering by end-2015.

Yahoo, which has come under fire from shareholders for failing to take aggressive action to reverse a decline in advertising revenue in the face of competition from Google Inc and Facebook, will hand most of the sale proceeds to its stockholders.

"For Yahoo it's a decent compromise, they were never going to keep all the 40 per cent stake and expect to see these guys IPO. I think they sold it off at a pretty reasonable valuation," said Michael Clendenin at RedTech Advisors in Shanghai. "Yahoo still has a lot of bigger problems ahead of them, I mean, they are a portal so they're going the way of the dodo bird."