eBay: No Longer Compelling Despite A Solid Classified Sale

Jul. 22, 2020 4:24 PM ETeBay Inc. (EBAY)7 Comments

Summary

  • eBay is selling its Classified business, a deal long anticipated and welcomed by the market.
  • The price tag looks a bit soft, and while the remaining ownership structure does not make the situation "cleaner," the deal looks very reasonable.
  • Investors react with a small sell-off yet this follows shares having more than doubled since the COVID-19 lows, with a lot of momentum baked into the share price.
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eBay (NASDAQ:EBAY) has seen a rare correction in its share price these days after a much rumored and anticipated sale of the so-called ''Classifieds Group'' has finally taken place, as investors might have hoped for a higher price tag, or a "simpler" sale. The deal seems fair yet investors act with some caution as the overall valuation has gotten quite a boost following COVID-19, with investors perhaps extrapolating current momentum a bit too much, at least too much for me.

"Sale" Of Classifieds

eBay has reached a deal with Adevinta ASA (OTCPK:ADEVF), a Norwegian company, to sell its Classifieds business in a deal valued at $9.2 billion. The price tag sounds somewhat in line with expectations, after activist investor Elliott placed a value of $8-12 billion on the activities.

While the price came in just below the midpoint of that, investors might be somewhat disappointed with the deal structure. eBay will only receive $2.5 billion in cash and will furthermore be granted 540 million shares of Adevinta, giving it a 44% equity stake in that business. That $6.7 billion equity stake is actually interesting as shares of Adevinta rallied 27% on the back of the news. This rally alone added about $1.8 billion to the valuation, bringing the total deal value to $11 billion at this point in time.

Perhaps not well known to many yet, Adevinta is a classified specialist with operations across 15 countries and across 35 products/websites. After combining the operations, the combined company expects to realize $150-$185 million in annual synergies within three years from now.

Updating The Thesis

My last thesis on eBay dates back late November of last year after it sold StubHub in a $4 billion cash deal. That deal was driven by the pressure initiated by activist investor Elliot Management which tried to unlock value in eBay after it had been a big laggard for quite a while. As revenues of that business came in at just $1.1 billion in 2018, which was combined with very modest growth, the valuation looked quite full.

Following that deal, I pegged a net cash position at $800 million. While that assumed no tax event as a result of the deal, the conclusion that eBay would have a flattish net cash position seemed about fair.

Shares traded around $35 in November with 837 million shares translating into a $29 billion equity valuation, or about the same valuation on an enterprise basis following the deal. With the company guiding for full-year sales around $10.75 billion and earnings around $2.75 per share, it was easy to conclude that valuations were very reasonable at around 3 times sales and around 13 times earnings, non-compelling multiples even if operations report flattish results. Of course, earnings were a bit lower if we adjust for stock-based compensation expenses, as I pegged realistic earnings around $2.20 per share, for a 16 times realistic multiple.

That stance might have been a little cautious. The company had a flat net cash position and traded around 16 times earnings; all comforting factors, certainly with activist investors onboard. The negative was of course the fact that the company was not really growing, although more good news would arrive as Elliott was pushing for the sale of the Classifieds business with a midpoint valuation around $10 billion. That is quite substantial, equal to $11-12 per share, representing about a third of the valuation at the time.

While I saw potential, I noted that a neutral to slightly bullish stance would be warranted, as the risk-reward was not great enough to jump onboard.

What Happened?

Since November, shares were trading around the $35 mark for quite some time, essentially until early to mid-March. Shares fell to $26 during the COVID-19 crisis but have ever since enjoyed the play-at-home rally. Shares nearly hit the $60 mark in mid-July, now selling off $2 to $56 and change on the back of the announcement of the sale of the Classifieds business.

No exciting news has been announced in the meantime, until very recently. Early 2020, the company reported 2019 results in line with expectations, closed on the sale of StubHub and provided the market with an update that the Classifieds business would be sold by mid-year (all ahead of COVID-19) as the company fortunately managed to pull this off.

The first-quarter results (as released in April) showed little of an impact of COVID-19 with revenues down 2% on a reported basis and up a percent adjusted for currencies. The company maintained the guidance for the year, with sales seen around $9.66 billion and non-GAAP earnings seen at a midpoint of $3.05 per share as the company rapidly built up a net debt load around $3.2 billion. This came after eBay spent $4.0 billion on buybacks in the first quarter when it acquired 98 million shares at essentially an average around $41 per share. This has shrunk the share base to 757 million shares, a significant reduction from the year before.

Trading at $57 at the moment, these shares are valued at $43.1 billion with an enterprise value above $46 billion, which includes now the $9.2 billion sale of Classifieds. As mentioned above, shares fell about 3-4% upon the deal announcement, translating into $1.5 billion in value going up into smoke, and that is despite the fact that the Classifieds business is essentially valued at $11 billion following the move in the acquirer's shares.

The reason for the multiple inflation is that shares have more than doubled from the COVID-19 lows and are up around 60% from the pre-COVID-19 levels as the business is thriving in this environment. Early June, the company provided an update for the second quarter. The company now sees volume growth around 23-26% for the second quarter, perhaps as consumers across the globe find time to clean up the house and sell stuff, while others have used the situation to buy lots of stuff. While volumes are up sharply, revenues are only seen up around 14% or about $340 million in actual sales growth. The great thing is the leverage on the bottom line with earnings per share expected to see a boost of $0.27 per share, equal to about $200 million in actual dollar terms. This suggests that nearly every dollar of additional revenue is flowing through to the bottom line on a pre-tax basis.

Of course, it can very much be questioned how sustainable this boom to the earnings is as I think investors might have a bit too much optimism baked into the share price as of late. Therefore, the negative reaction to the sale of the Classifieds business should be seen in that light. In the absence of COVID-19, multiples would have expanded from about 15-16 times to levels in the low-twenties, assuming that the current earnings momentum might not be extrapolated into the future. As activist investors have pressured the company to make the "easy" moves already, and the remaining core business is not really thriving either, I would be quite cautious here.

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This article was written by

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