By Alexei Oreskovic
SAN FRANCISCO (Reuters) - Activist hedge fund Third Point LLC reached an agreement to sell two-thirds of its stake in Yahoo Inc back to the company, pocketing a tidy profit and relinquishing three seats on the board of a company trying to effect a tricky turnaround.
Third Point's decision to sell a chunk of its single largest corporate holding comes as the struggling Internet company's stock fell over 4 percent on Monday after having surged more than 80 percent during the past 12 months, due largely to aggressive share buybacks and the value of Yahoo's Asian assets.
Third Point, headed by Daniel Loeb, struck an agreement to sell 40 million of its shares back to the company at $29.11 apiece, and retain about 20 million shares.
Third Point amassed the bulk of its stake in Yahoo during a one month period in 2011, acquiring some 45 million shares of Yahoo at an average price of $13.02 according to regulatory filings.
It was unclear why Third Point was selling its shares now. Third Point declined to comment, but Loeb expressed his confidence in Yahoo's prospects in a statement on Monday.
Chief Executive Marissa Mayer, the former Google Inc executive whom Loeb was instrumental in appointing, is about a year into a plan to try to bring viewers and users - and the revenue growth they represent - back to the former Internet icon. She has embarked on an acquisition spree to bring new talent into the fold, while driving video and mobile content to boost advertising revenue.
Shares in Yahoo, which are trading at their highest levels in more than five years, slid 4.3 percent to roughly $27.86 in the afternoon.
Loeb's move may prompt other shareholders to similarly re-evaluate their investment, said JMP Securities analyst Ronald Josey.
"Probably a lot of investors are saying, 'We had a pretty good run here, it makes sense to take some off the table,'" Josey said, adding, "Much like a lot of investors followed Third Point in, a lot will follow Third Point out."
Loeb was one of Yahoo's most vociferous critics before he joined the board, blaming management for ineffective performance and an incoherent revival strategy.
The hedge fund manager waged an aggressive, no-holds-barred campaign to upend Yahoo's management in 2011 and 2012, accusing then-CEO Scott Thompson of padding his resume with a non-existent computer science degree. Thompson was out within weeks.
Loeb is now credited with spurring change at a company that for years had shed market share and users to Google and Facebook, and went through a succession of CEOs before Mayer.
"He's done a lot of good stuff for Yahoo and we'll miss him. But it's not like he's essential to the turnaround," said Adam Seessel, head of Gravity Capital Management, who owned Yahoo shares. "The people that are essential now is Marissa and her team.
The fund settled a bitter proxy battle with Yahoo last year after months of criticizing the company. The resignations of directors Loeb, Harry J. Wilson and Michael J. Wolf were part of that deal reached in May 2012, Yahoo said.
Third Point had agreed it would quit the board should its stake in the company fall below 2 percent.
Despite Loeb's exit, Yahoo's turnaround is far from complete. Last week, the company trimmed its outlook for 2013 revenue after revealing a sharp 12 percent slide in ad prices in the second quarter, a sign that attempts to revive the struggling Internet giant may not produce quick results.
Many investors now look forward to the initial public offering of Chinese Internet conglomerate Alibaba Group, because Yahoo stands to profit from any gain in value of its roughly 24 percent of the Asian company.
Yahoo, which plans to fund the Third Point transaction primarily with cash, said it would increase earnings per share.
After the deal, about $700 million will remain under a $5 billion overall buyback authorization that Yahoo announced last year.
In a note to investors on Monday, Barclay's analyst Anthony DiClemente noted that Third Point's exit from Yahoo's board could lead to a change in the company's eagerness to return cash to shareholders.
"We believe investors are concerned that Yahoo could use further Alibaba proceeds for more acquisitions similar in size to the $1.1 billion Tumblr deal," wrote DiClemente.
Yahoo is among the world's most popular online properties, with hundreds of millions of monthly visitors, but its revenue growth has stalled as consumers and advertisers flock to Facebook, Google and other Web destinations.
The fact that the share buyback deal between Yahoo and Third Point was not priced at a slight discount raised some eyebrows.
"That could be a reasonable criticism," said Ryan Jacob, of Jacob Funds, noting that Third Point would not have been able to sell its entire stake for $29.11 a share had it tried to conduct such a large transaction on the open market.
But Jacob, whose fund owns Yahoo shares, said he did not believe Third Point's decision to sell reflected a loss of confidence in Yahoo's prospects.
"This is clearly an insider who's selling the stock," Jacob said. "My guess is this is a situation where it had become a very large portion of his fund and he wanted to maintain a smaller position, but didn't want to take any outsize risk."
(Additional reporting by Sinead Carew; Editing by Jeffrey Benkoe, Leslie Gevirtz and Ken Wills)