Tuesday, September 1, 2009

Ebay Subtracts a Negative

On July 24th, I wrote the following:
eBay management is planning to sell Skype in an IPO next year. Estimates of its “value” run as high as $3 billion. Some think that a mainstream telecom company may buy it before the IPO. Trust me, if you ever get a chance to sell a money-losing business for billions, do it! I have nothing against Skype, but my capitalist heart swells with pride at the thought of another $2 to $3 billion in net cash on eBay's balance sheet. And without Skype, eBay’s earnings look even better. eBay is essentially subtracting a negative.
in my post entitled "Short Amazon, Long Ebay"

Well, Skype never made it to the IPO. Today, eBay announced the sale of Skype (sortuv) to a private equity group led by Silver Lake Partners. eBay gets $1.9 billion in cash and a $125 million note, while maintaining a 35% stake.

Why didn't eBay sell it all? I don't know. They are incapable of cutting the cord and I am somewhat annoyed. What is the hold Skype has over people? It certainly isn't the fundamentals! Revenue growth is Skype's only draw, but does it make enough (or any) money to justify a $3 billion price tag? No.

Reminds me of the Internet bubble days of old... it's the "just you wait" phenomenon. Will Skype's gilded future ever come? I doubt it. So I'm glad Ebay gets $2 billion for what I think is a grossly overvalued asset, but I'm left unsatisfied.

With a 70% gain in eBay since my purchase in January, this one may be getting long in the tooth. Southeastern Asset Management (Longleaf) and other value guys bailed out long ago. That said, adjusting for $3.5 billion in cash (and the latest $2 billion infusion), eBay still isn't expensive. The free cash flow multiple is barely 12 by my calculations. And there isn't a prettier balance sheet around.

Decisions, decisions!?!

7 comments:

  1. Agree with you. It would have been nicer to get rid of skype entirely while there is still some hype about skype.

    They are keeping Paypal which is still growing rapidly and a nice business on its own.

    The core auction business might not be growing but the moat there is intact. The business should hardly require any capex at all so there is room to grow that free cash flow further.

    And since the current management is trying to get rid of old acquisitions, the next cycle of stupid acquisitions is at least few years out.

    I will continue to hold Ebay till it becomes more expensive than KO or MCD.

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  2. Thanks Ravi. More expensive than KO? Hmmm. That'd be 20x fcf! That would be nice. Market cap for eBay could go between $40 and $50 billion! You're an optimist ;-)

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  3. Ebay is the place to transact online here in India. There is no close second.

    Without spending a dime on advertising if you could command such a position, it's worth some multiple.

    The option of paypal is also very nice. It might be sold to Visa or MasterCard some day. But they better do it soon.

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  4. I would guess that the difficulty in coming up with another $1B in this environment likely precluded the outright sale of Skype. I agree that shares aren't particularly overvalued given the cash sitting on the balance sheet (with more to come) and the strong cash flow generation of the remaining businesses, but at the same time, holding cash doesn't yield much of a return these days and EBAY's management hasn't yet proven to be the most capable capital allocators (M&A success seems pretty mixed). I've sold most of my position as of today, but still holding some in less tax efficient accounts. I would love to see this company initiate at least a modest dividend and continue improving the core marketplace operations. The moat around the business will slowly disappear in my opinion if we don't see a shift back toward auction listings and away from fixed price.

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  5. Kevin, 6 months ago this may have been the reason, but believe me... these private equity guys were not short $1 billion. eBay wanted participation going forward. You can be sure of that. Also, the current management is not the group that did the stupid deals. They have been heavy buyers of EBAY shares. That has been a very good use of capital. I look forward to their next decision regarding the excess cash. You may get your dividend, but I suspect more share repurchases. Look at some recent statements and see how shares outstanding have fallen. Your opinion of the current managers may improve.

    Ebay's standing as an exchange has not fallen and in this environment, everyone is searching the attic for things to sell. Auctions will improve and have improved.

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  6. According to Barron's, "Skype... represents just 6.5% of annual revenue and 4% of operating profit for eBay."

    Using that revenue percentage and the pricing of the Skype deal, Ebay would be worth between $45 and $50 billion. Funny.

    I'd say Skype is insanely overvalued or eBay is still cheap. Or both.

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  7. Skype is not valued on sales or profits but on funny metrics like # of subscribers. Yes, eyeballs have become earphones.

    You will find statements like if skype were a carrier, it would be no 3 in the world behind China Mobile and Vodaphone.

    * China Mobile (415 M subscribers, 25% yoy growth) Market cap 199 B
    * vodaphone (269 M subscribers, 16% yoy growth)market cap 110 B
    * Skype (370 M subscriber, 51% yoy growth)

    I don't subscribe to this funny math but that's how they think.

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