How Will MercadoLibre's IPO Affect EBAY Latin America?

I have been following MercadoLibre (MELI), and its planned IPO for some time now. For those that don't know MercadoLibre, it is the leading online auction player in Latin America. After selling its Brazilian site to MercadoLibre in 2001, EBAY became MercadoLibre's largest shareholder with a 19.7% stake. Incidentally, the non-compete clause that was associated with the transaction lapsed only 10 months ago, which means that if it chooses to do so, EBAY is now free to launch/re-launch its own auction business in Latin America.

You can review their latest IPO prospectus here. In summary, it is pricing shares between $16 and $18, and will have 44.2 million shares outstanding following the IPO. This equates to an IPO valuation of $750 million, of which EBAY will own 18.5% post-offering.

What strikes me here is the incredible valuation given how likely it will run into competition from EBAY and PayPal. With net income in 2004, 2005 and 2006 of ($2.2m), $2.4m, $1.1m respectively, and an annualized 2007 net income of around $4.0m, we are talking about a forward P/E in 2007 of around 190x.

Key to this investment are EBAY's plans in Latin America. It really has only three alternatives:

First: It could do what it just did with Craigslist a few months ago. That is, keep its minority investment in MercadoLibre, while at the same time launching its own wholly-owned platform. This way it is riding the two leading horses. This is my own prediction of what will happen in the next 12 months.

Second: It could do what Google did with Baidu last year. That is, sell off its stake in MercadoLibre and dedicate itself fully to launching a competing platform. Given that it is the only existing shareholder not to sell a single share in the IPO, I don't think this is likely. It is clearly of value to EBAY to continue being MercadoLibre's largest shareholder, at least for the time being. It is important to note that, EBAY is also subject to the 180 day lockup.

Third: EBAY could decide that it has enough on its hands with the U.S. and Europe, and that MercadoLibre represents the best return that it can opt for in Latin America. In this case, I doubt EBAY would be content with an 18.5% stake. That said, one has to assume that if its intention was to increase its stake in MercadoLibre, then it would have done so already, by buying out any one of the several financial investors in the project.