What's changed
On 9/30, eBay's Board of Directors approved a plan to separate eBay and
PayPal into independent publicly traded companies, which it expects to
complete in 2H15 subject to market and regulatory conditions. Reflecting
the increased likelihood of M&A for the proposed independent companies,
we incorporate an M&A component (weighted 15%) into our valuation. As
a result, our 12-month price target for eBay increases to $68 from $61,
implying 20% upside. We maintain our CL-Buy, given the relative
risk/reward we see in owning eBay based on our expectations that the
Marketplaces business recovers from the events of the past six months,
competitive fears for PayPal ease over the coming months, and the
potential for M&A drives a rerating of the combined company.
Implications
Management changes. Post the proposed separation, Devin Wenig, eBay
Marketplaces president, will become CEO of eBay. Dan Schulman, most
recently President of Enterprise Growth at American Express, has joined
PayPal as President and will become CEO. Current CEO John Donahoe and
CFO Bob Swan will oversee the separation and serve on one or both
boards. Estimates. We maintain our 2014-16 revenue estimates while we
lower adjusted EBITDA by 1% on average to reflect the likelihood of
incremental investment at PayPal.
Valuation
Our 12-month price target increases to $68 from $61 based on an 85%/15%
blend of our SOTP valuation of $63 (implying 10.7X 2015E EV/EBITDA) and
M&A valuation of $97 (Exhibit 3). We raise our M&A rank for the combined
company from 3 to 2 to reflect the potential strategic value of the business to
acquirers if the proposed separation is completed.
Key risks
(-): Competition, execution on proposed separation, take rate pressures,
investment needs.