*Belgium Q3 GDP Up 0.4% On Quarter Vs.0.3% In Q2; Flash Unrevised eBay ( EBAY ) announced a lucrative deal for shareholders as it has sold its StubHub unit in a more than $4 billion cash deal.The deal is driven by the pressure initiated by Elliott Management which is trying to unlock value in eBay as its growth and share price performance have been underwhelming compared to peers.While I see the rationale for the deal and multiples for StubHub look very high, and the plans of Elliott seem to make sense, I do not see a compelling risk-reward at this point in time.The Deal eBay has reached a deal to sell its StubHub unit to Viagogo in a cash deal worth $4.05 billion.Interim CEO Scott Schenkel stresses that the board has contemplated all options to maximize shareholder value, yet in the end it was determined that a sale of StubHub was the best outcome.
The ticket marketplace for life sport, music and entertainment events has been the choice of many fans to obtain tickets at competitive prices in a secure setting, including guarantees.Eric Baker, the founder and CEO of Viagogo actually founded StubHub and sold it to eBay in a $310 million deal back in 2007.
Now more than 12 years later he is buying the business back at more than 10 times the initial value attached to the business back in 2007.The unit generated $1.08 billion in sales in 2018 with revenue growth coming in at low single digits.Being able to sell a unit with very modest growth and modest margins at a 3.8 times sales multiple sounds pretty solid.A Big Boost To The Balance Sheet eBay held cash, equivalents and investments worth $4.5 billion at the end of the third quarter, as the deal could essentially double this gross cash position towards $8.6 billion.Total debt stands at $7.8 billion, suggesting that the company overnight could operate with a net cash position of around $800 million.That is a bit too optimistic, as it seems that this will become a taxable event because of the structuring of the deal, yet the conclusion seems fair to say that eBay operates with a flattish net cash position following the deal.
Trading at $35 per share, the 837 million shares outstanding represent a $29 billion equity valuation implying that eBay’s operating assets are valued at $32 billion ahead of the deal.For the current year the company guides for more or less flattish reported revenues, although up slightly adjusted for currency effects.Sales are seen at a range of $10.75-$10.80 billion, with adjusted earnings seen around $2.75-$2.78 per share.With a $32 billion valuation ahead of the deal, all of eBay is valued just below 3 times sales, far below the multiple at which StubHub is now valued.
This is certainly the case as segment margins of the unit come in at low double digits, below that of eBay at large.The sale of the unit at a very high segment profit multiple suggests that interest expenses being avoided, or actually net interest income being generated, more than offsets the earnings contribution of the unit.
Hence, eBay will shrink somewhat in sales, but not in profits, as the adjusted earnings number should not really be impacted.
Note however that this number excludes over half a billion in stock-based compensation, or about $0.60 per share, being a real expense.Hence I am happy to work with a $2.20 per share realistic earnings number.The Thesis Based on the $2.20 per share in fair earnings power as calculated above, the initial optimism fades quite rapidly.Trading around the $36 mark, shares actually trade at 16 times realistic earnings measure.While this marks a small discount to the market, and we have to acknowledge that the company operates with a flattish net cash position, reality is that growth is pretty much non-existent.The counterargument is that more focus on the core should perhaps reignite growth somewhat, although the days of double digit growth are far behind us, and the question is if this could be achieved again.In January of this year I last looked at eBay following the involvement of Elliott Management, the activist investor.
This investor aggressively called for a spin-off or sale of StubHub and Classifieds, as the first has happened now.At the time, Elliott actually put the value of StubHub at $3.5-$4.5 billion, with the deal tag coming right within the middle of the range.
That bodes well for the classified business, valued at $8-12 billion by Elliott.Trading at $30 in January, Elliott believes that good execution might allow shares to double in 2020, as I called that guidance downright aggressive, with shares now at $36, down from the highs in the low-forties this summer.I noted that while Elliott might be right, I had my own concerns about the thesis on the remaining core business, certainly given the fierce and relentless competitive threat posed by Amazon.com (NASDAQ: AMZN ).This competitive threat and the usual ”solution” of selling assets and cutting costs might not just do it in this case, although it is too early to rule on the outcome of the Elliott thesis, and in fact shares are up 20% from those levels.While a sale of the Classified business at $8-12 billion could be very compelling, adding about $8-12 per share in cash, eBay remains a show-me-first story, although one which I will follow with continued healthy interest.For now I am sticking to a neutral to slightly upbeat thesis, although the risk-reward is not good enough to jump on board in my opinion.
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