Ebay To Spin Off PayPal, Taking Carl Icahn's Advice
A little over a month ago, eBay (EBAY) stock soared almost 5% on talks of a possible spinoff of its cash cow unit PayPal. Today in a press release, eBay announced that it will spin off its PayPal payments unit into a separate publicly traded company as early as the second half next year. The stock is currently trading at $56.28, up about 7% for the day on this report.
After the transition is completed, John Donahoe, eBay’s current chief executive, will step down from his role. This move comes months after activist Carl Icahn first demanded the push to unlock shareholder value. This push from a hedge fund comes days after activist investor Starboard Value wrote a letter to Yahoo! (YHOO) CEO Marissa Mayer to acquire AOL with some conditions. It has been a frequent demand by activist shareholders who buy positions in companies and call for changes aimed at driving up stock prices.
There was a lengthy battle between eBay and the billionaire hedge fund regarding PayPal, who initially demanded the spinoff to generate value for shareholders. According to Mr. Icahn, the move would highlight PayPal’s own strength while letting its management team and eBay focus on their own core business.
History
eBay acquired PayPal in 2002 and has become the standard transaction payment for the online marketplace. Since then, it has become one of the most lucrative divisions of eBay, accounting for about 41% of eBay’s total net revenue last year. Over the last 12 months, PayPal processed about $203 billion in payment volume and account for about 153 million active digital wallets.
Current Business Transition
In accordance to the press release presentation:
| eBay | PayPal | |
| Transaction VolumeLTM | $85B | $203B |
| Transaction Volume GrowthLTM | 13% | 26% |
| LTM Revenue | $9.9B | $7.2B |
| YoY Revenue Growth | 10% | 19% |
| Segment Margin | 35% | 25% |
| Global Installed Base | 149M | 152M |
- Accelerating pace of change in payments and commerce… separation best positions each business to capitalize on growth opportunities.
- Makes eBay more agile and focused to bring targeted innovation
- Reflects confidence we can preserve relationships and avoid dis-synergies through arm’s-length operating agreements
- Enables optimal capital structures to match specific business unit needs
- Provides investors direct exposure to pure play commerce and payments businesses
Transaction Overview
- Tax-free spinoff to eBay Shareholders
- Separation expected to be completed in the second half of 2015
- Current debt is expected to remain at “new” eBay
- Both companies are expected to incur one-time charges related to the transaction preceding the separation
Bottom Line
This spinoff will be beneficial for both PayPal and eBay, and should increase sector growth within each company. Both companies will now be able to concentrate on what they do best without being impacted by adverse events from either company.
Since the business transaction will be done next year, the transition should not adversely impact any potential issues with the holiday season. We currently rank eBay as a Zacks Rank #3 (hold). eBay has beat earnings estimates by an average of .64% for the past year and have a current quarter consensus EPS estimate of 57 cents.
Disclosure: None.
The spinoff is favorable to PayPal. With the adjustment in management team, PayPal now has American Express’s former executive Dan Schulman, who was specializing in the Enterprise Growth area of AmEx as the company’s Chief Executive Officer. This would allow PayPal to better arrange its strategic roadmap and focus on its payment solutions and products to tackle this "app era", including the appearance of a recent competitor "bitcoin". From eBay’s side, along with Alibaba's IPO, this spinoff action could give eBay the opportunity to center on the new generation competition locally and internationally and potentially push growth in the long term. One thing we cannot ignore is that this action could bring loss to eBay in the short term. PayPal is eBay's payment arm and made 40.30% of eBay's total net revenue in fiscal year 2013. The left of PayPal not only means the cut in revenue but also loss of partnerships eBay used to build with its PayPal services. We still need to watch eBay’s moves in the next few months to decide how this would affect eBay’s overall business sketch.