Topic: Spinoffs

Activists call for another eBay spinoff

eBay LISTEN:  

eBay spun off its PayPal transaction-processing business in July 2015. Since then, eBay shares has gained 38%. Over that same time, PayPal has jumped 170%.

Two activist investors have now targeted eBay. They want the company to spin off its classified ad and StubHub ticket re-selling operations. (In our January 2018 issue, we felt the company was in a strong position to spin off these businesses.)

So far, eBay has resisted the pressure of its activist investors, but their involvement helps draw attention to the company’s prospects. At the same time, eBay aims to spur its value with share buybacks and dividends.

EBAY INC. $36 (Nasdaq symbol EBAY; Finance sector; Shares outstanding: 914.9 million; Market cap: $32.9 billion; Dividend yield: 1.6%; Takeover Target Rating: Medium; operates e-commerce websites where sellers pay fees to auction items or offer them at fixed prices. The company also operates several other websites, including StubHub (ticket sales). These services are in addition to its local websites (among them Kijiji in Canada); eBay, in fact, sells classified ads in over 1,500 cities.

  • eBay began operating in September 1995; completed IPO in September 1998 at $0.75 a share (adjusted for splits)
  • Has 175 million active users worldwide
  • Gross merchandise volume (total value of goods sold) on its auction websites was $23.2 billion in latest quarter

Excluding PayPal, the company’s revenue declined 2.3%, from $8.79 billion in 2014 to $8.59 billion in 2015. Revenue rebounded 8.2% to $9.30 billion in 2016, and rose to $9.93 billion in 2017 and $10.75 billion in 2018.

eBay’s overall earnings, before unusual items, fell 56.3%, from $3.1 billion in 2014 to $1.35 billion in 2016. The company is an aggressive buyer of its own shares, which is why earnings per share declined at a slower rate of 52.7%, from $2.45 to $1.16. eBay’s earnings then improved to $1.84 a share (or a total of $2.0 billion) in 2017, and reached a record $2.55 a share (or $2.5 billion) in 2018.

The company added 9 million active users to its platforms in 2018. It now has a total of 179 million users. Those gains are largely due to upgrades to its websites. That has made it easier for shoppers to find the items they seek.

eBay also continues to benefit from new features it has added to its websites. Those include authenticating high-priced luxury items to prevent fraud, and making it easier for users to sell their old smartphones.

As of December 31, 2018, the company held cash and investments of $8.7 billion, or $9.50 a share. Its long-term debt of $7.7 billion is a manageable 23% of its market cap.

Activist investor Elliott Management Corp., which owns about 4% of eBay, has now demanded the company spin off StubHub and its classified ads businesses. In 2018, StubHub accounted for 10% of total revenue, while the classified ads operation supplied a further 10%.

In addition, the activist wants eBay to improve efficiency at its auction websites and buy back $5 billion of its shares. Elliott predicts these moves would increase the company’s share price to between $55 and $63.

A second activist, Starboard Value LP, also owns a 4% stake in eBay. It’s likely to support Elliott’s proposals.

In response to the activist pressure, the company added $4.0 billion to its share repurchase authorization. It expects to buy back $5.0 billion of its shares in 2019. As well, starting in March 2019, it will begin paying a quarterly dividend of $0.14 a share. The annual rate of $0.56 yields 1.6%.

For 2019, eBay should earn between $2.62 and $2.68 a share. It trades at just 13.6 times the midpoint of that range.

eBay is a buy.

PAYPAL HOLDINGS INC. $94 (Nasdaq symbol PYPL; Finance sector; Shares o/s: 1.2 billion; Market cap: $112.8 billion; Takeover Target Rating: Medium; No dividends paid; processes online transactions, including purchases made through eBay’s websites. It has recently expanded into physical stores and mobile payments.

PayPal’s revenue jumped 67.1%, from $9.25 billion in 2015 to $15.45 billion in 2018. Overall earnings also gained 67.5% during those four years, from $1.23 billion to $2.06 billion. As a result of fewer shares outstanding, earnings per share soared 71.0%, from $1.00 to $1.71.

The gains are partly due to acquisitions. In May 2018, the company bought iZettle AB for $2.2 billion. Based in Sweden, that firm makes equipment and software to let merchants accept credit- and debit-card payments.

iZettle and other new businesses will help offset eBay’s plan to replace PayPal with Netherlands-based Adyen BV as its main payments processor. The deal with Adyen takes effect in 2021; however, PayPal will continue to process eBay transactions until July 2023.

PayPal can easily afford to keep expanding. It ended 2018 with cash and investments of $10.1 billion, or $8.59 a share; it had no long-term debt.

The company will probably earn $2.84 to $2.91 a share in 2019, while the stock trades at 32.7 times that forecast. That high multiple is still acceptable considering the company’s strong growth prospects.

PayPal is a buy.


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