eBay: An Extremely Attractive Buyout Target

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Includes: BNI, BRK.A, EBAY, MA, V
by: Harry Long

At $22.16 a share on Friday, eBay (NASDAQ:EBAY) is an extremely attractive buyout target. It has that rare combination of stable free cash flows, low capital expenditures, and a cheap valuation relative to its quality.

There is absolutely no question that the eBay's auction/marketplace business is organically growing more slowly and that growth by acquisition of regional powerhouses such as Korea's Gmarket could be the key driver of growth for that business line in the future.

However, businesses such as Paypal have dramatic organic upside potential and are still growing at a very fast pace. In the latest quarter, revenue from Paypal increased 26%, year over year.

At an EV/EBITDA of less than 9, that is a fair to cheap valuation for the auction business, and that valuation essentially gives one a very cheap call option on Paypal, which I believe could become an even more serious competitor to Visa, Mastercard, and traditional bank-centric transactions

In addition, the quality and stability of eBay's historical free cash flows stacks up very favorably against those of recent large acquisitions.

Table 1 is a summary of 10 years of Free Cash Flows at a large company that was recently acquired (click to enlarge images):

Click to enlarge

Table 2 is a summary of 10 years of Free Cash Flows at eBay:

Click to enlarge

Can you guess which company is our “Mystery Company”? It's Burlington Northern Sante Fe (BNI), recently acquired by Berkshire Hathaway (NYSE:BRK.A). I believe that if one compares the growth records of each company, along with rudimentary estimates about which company will require more capital investment in order to grow in the future, that eBay compares quite favorably.

Then, it really comes down to one's estimate of how certain future cash flows are from each. I will leave that calculation to the gentle reader, but suffice to say, eBay would be a very shrewd acquisition for a buyer that covets large and growing free cash flows.

Disclosure: Author holds a long position in EBAY