PayPal's (PYPL -2.5%) $890M, all-cash, acquisition of online money transfer/remittance provider XOOM (first announced on July 1) is on the books.
Xoom will continue operating as a separate service, and CEO John Kunze will join PayPal's executive team (reporting to PayPal chief Dan Schulman). As previously announced, the deal is expected to be slightly dilutive to 2016 EPS.
Last week, Xoom reported Q3 revenue of $42.4M (+8% Y/Y) and a non-GAAP net loss of $2.8M. Gross sending volume totaled $1.9B (+12%), and active customers 1.47M (+21%).
PayPal is adding to the moderate losses seen yesterday following a report Apple is planning to launch a mobile P2P payments service.
EBAY closed up 2.4% following news PayPal (Pending:PYPL) is buying top online international money transfer service XOOM for $890M. With PayPal now just 18 days away from trading separately, eBay is within $1.50 of a 52-week high of $63.30. Western Union had a less favorable reaction to the deal.
Street reactions to the purchase have been largely positive. SunTrust's Bob Peck: "We see synergies/opportunity between Xoom and [mobile payments platform] Venmo inside the PayPal ecosystem enabling lower cost (ACH, or debit worse-case) wallet funding (PayPal, Paydiant) and in-market and cross-border [consumer-to-consumer] and [consumer-to-business] transactions. This could serve to sustain relevance on the consumer side and (interrelated) preserve/lower funding cost and strengthen the value proposition on the merchant side."
Baird's Colin Sebastian: "Both PayPal and Xoom have competitive advantages from fraud-detection technology underlying their respective products. While Xoom’s engine was initially built using concepts borrowed from PayPal, they have since extended the functionality to peer-to-peer international remittance..."
Keefe, Bruyette & Woods' Sanjay Sakhrani: "[I]nternational money transmittance is a highly adjacent business to P2P payments and digital wallets, which is PayPal's core business…Despite a fairly rich valuation, XOOM is growing quickly and brings to the table a scalable, bolt-on platform to help offer additional value-add..." Morgan Stanley's Brian Nowak sees an opportunity to significantly expand Xoom's op. margin (4% in 2014).
Xoom closed at $25.05, slightly above PayPal's $25/share buyout price. SunTrust's Andrew Jeffrey thinks Western Union and/or Internet companies could make a rival bid. Baird's Sebastian: "Higher bid from traditional money transfer company still plausible given a PayPal-Xoom combination presents a much greater (and better-capitalized) competitive threat."
PayPal (EBAY, PYPL) is acquiring leading online money transfer/remittance service provider XOOM for an enterprise value of $890M, or $25/share, in cash.
The price represents a 21% premium to Xoom's Wednesday close. The deal comes ahead of PayPal's mid-July spinoff into a separate, publicly-traded, company. XOOM has been halted.
PayPal president/soon-to-be-CEO Dan Schulman: "Expanding into international money transfer and remittances aligns with our strategic vision to democratize the movement and management of money ... Xoom's presence in 37 countries in particular, Mexico, India, the Philippines, China and Brazil will help us accelerate our expansion in these important markets."
The deal is expected to close in Q4, and be slightly dilutive to PayPal's 2016 EPS. PayPal plans to pay for it with existing cash. Xoom will operate as a separate service within PayPal.
Recent PayPal acquisitions include white-label mobile payments services provider Paydiant, cybersecurity software firm CyActive, and rival online/mobile payments service provider Braintree.
XOOM has added considerably to the premarket losses seen following a Susquehanna downgrade to Neutral. Volume (522K shares) has already topped a 3-month daily average of 412K.
"While we are constructive on the shares longer term, we think consensus is full and the stock may move sideways in the interim," says Susquehanna's James Friedman, discussing his downgrade. He notes shares had risen 56% in Q2, states World Bank data points to service price declines in India, the Philippines, and Mexico (major Xoom markets), and observes Moneygram and PayPal's Venmo unit have "made some revisions" to their offerings that may overlap with Xoom's.
Friedman: "While none of these services may be as fast or elegant as Xoom, they are viable in our opinion." Moneygram is now charging $4 to transfer $200 to Mexico and the Philippines, and nothing for transferring to India. Meanwhile, PayPal is set to take Venmo international, and Ria's automated clearing house (ACH) money transfer prices for India, the Philippines, and Mexico undercut Xoom's.
After starting the day off quietly, Xoom (XOOM +6.6%) has shot higher over the last hour. 464K shares have already been traded, topping a 3-month daily average of 425K.
The online money transfer provider is now up 36% from a February low of $13.82, set after shares tumbled in January on account of a fraud disclosure. They surged two weeks ago following a Q1 beat and in-line guidance, and gained last week in response to a report Western Union is in talks to buy MoneyGram.
Xoom (XOOM +1.9%) appears to be getting a lift from a Bloomberg report stating Western Union is in talks to buy long-time money transfer rival MoneyGram.
Western and (especially) MoneyGram have soared on the report. Should a deal be inked, Western/MoneyGram will likely cite the existence of online/mobile rivals such as Xoom as a reason why antitrust regulators should clear it.
Last week: Xoom soars following Q1 beat, in-line 2015 guidance
With shares having gone into earnings far below their 2013 highs following a string of earnings disappointments, XOOM's in-line 2015 guidance is going over well: The online money transfer platform expects revenue of $191M-$196M and EPS of $0.34-$0.43 vs. a consensus of $194.1M and $0.37. Q2 guidance is softer: Revenue of $46M-$48M and EPS of $0.05-$0.10 vs. a consensus of $49M and $0.10.
Gross sending volume rose 6% Y/Y in Q1 to $1.7B, a slowdown from Q4's 29% growth. Transactions rose 23% to 3.55M (implies lower average transaction size), active customers 19% to 1.34M, and gross customer adds 14% to 156K. Xoom is no longer sharing new customer adds, arguing gross adds are more important.
GAAP operating expenses rose 29% Y/Y to $33.2M, exceeding revenue growth of 24%. Xoom ended Q1 with $240.5M in cash/short-term investments (equal to nearly 1/3 of its current market cap), and no debt. The company is counting on its recent expansion into China and Pakistan to boost future growth, as well as newer services such as Bill Pay and Top Up (enabled by last year's BlueKite acquisition).
Short-covering could have much to do with today's gains: 5.1M shares (over 1/5 of the float) shorted as of April 15.
Believing shares will benefit from "the continued secular shift towards mobile payments," Macquarie has launched coverage on Xoom (XOOM +1.7%) with an Outperform rating and $20 target.
The firm observes Xoom has underperformed (slower-growing) money transfer peers Western Union and Moneygram in 2015 thanks to soft guidance and a fraud disclosure. It adds Xoom has averaged a 21% gain in June over the last two years, something Macquarie believes was aided by strong Mother's Day remittances.
Q1 results arrive on April 28. 4.8M shares (nearly 20% of the float) were shorted as of March 31.