eBay Inc (NASDAQ:EBAY) announced this week that it plans to spin off PayPal into a separate, publicly-traded company. Investors were immediately excited about the news, but will there be any real value created by the spinoff? Bernstein analysts weighed in on the news.
eBay, PayPal to create agreements
In this week’s announcement, eBay management said they will be working on putting “arm’s length” agreements in place with PayPal. In a report dated Oct. 2, 2014, analysts Carlos Kirjner and Peter Paskhaver said these agreements are going to play an important role in whether there is any real value created by the spinoff.
At the end of October, the value investor Mohnish Pabrai gave a presentation and took part in a Q&A session at Boston College and Harvard Business School on the Uber Cannibal Investor Framework, which he has developed over the past decade. Uber Cannibals are the businesses “eating themselves by buying back their stock,” the value Read More
Currently, the two big synergies for PayPal and eBay together are PayPal’s exclusivity on eBay and also the fact that eBay is an important channel for PayPal to acquire new customers. After participating in the conference call about the spinoff, the Bernstein team said they think the main objective is to maintain both businesses’ current margins, at least in the beginning.
eBay management must walk a fine line
The analysts say if eBay management is able to put in place agreements that are effective for both companies, then there will be value created by the spinoff. They say that management must avoid dis-synergies while protecting the current synergies and also the “de facto cross subsidies from Marketplaces into PayPal.”
If management can do both of these things, they say the spinoff is a good idea. The Bernstein team added that eBay’s current management team “is by far the best party to evaluate the complexity and risks” of this spinoff. As a result, they believe investors “should give the deal the benefit of the doubt.”
What PayPal can do
The analysts say that when PayPal is a standalone public company, it will better be able to attract and retain talent by offering shares of its stock. Also they think that the company will be able to better manage its margins and investments, keeping them in line with its growth potential and profile. They say PayPal will be free to do this without being held down by eBay Marketplaces, which is growing more slowly and has different profitability and growth profiles.
In addition, they point out that PayPal will become a more attractive partner for some parties and may even become a potential acquisition target. They suggest that perhaps Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) might want to buy PayPal. They also say that perhaps, “in the minds of the uber-bull event driven investors,” anyway, Google might end up in a bidding war with Apple Inc. (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB), Verizon Communications Inc. (NYSE:VZ) and many financial institutions. They point out though that PayPal would be an unusually large acquisition for Google to make, so it’s a highly speculative view.
The Bernstein analysts also offer three different possibilities of valuing PayPal in terms of eBay share. Their estimates range from $27 to $31 per eBay share and between $34 billion and $38 billion in enterprise value.
Using a multiple of 22 times EV / GAAP EBIT on PayPal’s 2016 GAAP EBIT, they get a valuation of $31 per share.
Second, they get a value of $27 per share by starting with PayPal’s GAAP earnings and then applying corporate overhead to the company’s Segment contribution and using eBay’s tax rate. This would give about $1.3 billion in GAAP earnings in 2016. They use a GAAP earnings multiple of 25 times to arrive at $27 per share.
A third way to look at it is through DCF, which suggests that PayPal is worth around $30 a share. They looked at PayPal’s D&A, capital expenditures and working capital based on PayPal’s revenue share compared to all of eBay.