By Sam Nussey
TOKYO (Reuters) - SoftBank Group <9984.T> is increasing its stake in Yahoo Japan <4689.T> through a $2 billion, three-way deal with U.S. firm Altaba <AABA.O> to deepen ties with the internet heavyweight ahead of an IPO of its telecoms unit.
The transaction, with just $9 million net investment by SoftBank, allows it to boost ownership of Yahoo Japan without pressuring its already strained balance sheet. It also leaves SoftBank's domestic telecoms unit with a 12 percent stake in Yahoo Japan, highlighting for investors the two companies' ties ahead of its planned listing.
In the case of Altaba, formerly called Yahoo Inc which also owns about 15 percent of Chinese e-commerce giant Alibaba Group <BABA.N>, the deal helps monetize some of its investment in the joint venture it set up with SoftBank in 1996.
And for Yahoo Japan, the deal could strengthen ties with its biggest shareholder SoftBank and help to assuage concerns of investors who have seen its shares tumble this year. Yahoo Japan's shares ended 11.4 percent higher in Tokyo on Tuesday.
SoftBank announced on Tuesday it will buy 221 billion yen ($2 billion) of Yahoo Japan shares from Altaba. Yahoo Japan will then buy back 220 billion of stock from SoftBank.
As a result of the transaction, SoftBank's stake in Yahoo Japan will rise to 48.17 percent from 42.95 percent.
SoftBank said in a statement the deal will strengthen cooperation between the company, one of Japan's big three telecoms firms, and Yahoo Japan, an internet heavyweight in areas such as news and shopping.
The synergies between SoftBank and Yahoo Japan are "consistent with SoftBank Group's broader strategic synergy group initiative," SoftBank Chief Executive Masayoshi Son said in the statement.
SoftBank and its Vision Fund, the world's largest private equity fund standing at over $93 billion as of May last year, have been taking minority stakes in technology companies around the world that Son believes will come to dominate their respective fields.
SoftBank is preparing to list its domestic telecoms unit in what could be the largest Japanese IPO in nearly two decades.
Yahoo Japan could use SoftBank's telecom services to boost demand for online shopping and mobile payments among Japan's increasingly net-savvy shoppers. SoftBank, through Yahoo Japan and others, is offering its mobile users an increasingly wide range of top-up services in addition to a basic phone subscription.
Yahoo Japan is one of Japan's most successful internet companies, with its services from earthquake alerts to online auctions to weather forecasts ubiquitous in the lives of many consumers.
But its investment plans to fend off competition from rivals such as Rakuten Inc <4755.T> and new upstarts such as Mercari Inc <4385.T> have weighed on its shares, which are down more than 22 percent this year.
"It's clear that using excess funds for share buybacks is the only way Yahoo Japan has to hold up its share price," said Yasuo Sakuma, chief investment officer at Libra Investments. The firm does not hold positions in Yahoo Japan or SoftBank.
Altaba has been selling down its Yahoo Japan stake. Two Altaba appointments to the Yahoo Japan board will step down as a result of the transaction announced on Tuesday.
SoftBank shares ended up 2.1 percent on Tuesday, with the benchmark Nikkei 225 index <.N225> finishing around 0.7 percent higher.
(Reporting by Sam Nussey; Additional reporting by Chris Gallagher and Tomo Uetake; Editing by Stephen Coates and Muralikumar Anantharaman)