Fitch: eBay's Ratings Unaffected by Proposed Acquisition of GSI Commerce
By: eBay Inc. Staff
NEW YORK--(BUSINESS WIRE)--Fitch Ratings does not expect eBay Inc.'s (eBay) proposed acquisition of GSI Commerce, Inc. (GSI) to have an impact on eBay's ratings.
Fitch expects eBay to fund a majority of the approximately $2.4 billion transaction using existing U.S.-based cash with a minority portion being debt financed. eBay had $5.6 billion in total cash at the end of 2010 plus $1 billion in short-term investments.
Fitch expects eBay's leverage to rise modestly, but remain below 1.0 times (x), following the transaction close which is currently anticipated sometime in the September 2011 quarter. Fitch calculates eBay's 2010 EBITDA at $3.2 billion and total debt at $1.8 billion (current leverage of 0.6x) which implies $1.4 billion in headroom for additional debt while keeping within expected leverage metrics. This does not include expected EBITDA growth for eBay in 2011 plus the expected EBITDA contribution from GSI in 2011 which, based on current consensus estimates, Fitch estimates would be in excess of $100 million after taking into account certain expected divestitures of GSI business segments.
Fitch believes this acquisition represents an extension of eBay's global marketing platform, including its Marketplaces websites and associated technology, to large retailers, further diversifying away from eBay Marketplaces' historical reliance on individual and small retail sellers. GSI already offers PayPal services to its customers, which suggests upside to PayPal from this deal is modest. On the flip side, eBay is acquiring a retail fulfillment service that includes product warehouses and associated fixed expenses. GSI's EBITDA margins are historically well below that of eBay, i.e. 7% versus 35%, in 2010. A key eBay credit concern has been the potential for the company to sacrifice the premium margins and cash flow generated by its Marketplaces business in lieu of revenue growth opportunities or, similarly, the use of debt to finance acquisitions with low profitability and cash flow metrics. While this transaction is small relative to eBay overall, it is possible that similar additional deals could pressure the ratings.
eBay's ratings and outlook reflect the following considerations:
--eBay boasts market-leading online commerce (eBay Marketplaces) and payments (PayPal) businesses. The company's conservative financial policies and credit protection measures, as well as strong financial flexibility and liquidity highlighted by a free cash flow (FCF) conversion rate in the range of 25% of revenues further support the ratings and Outlook.
--Fitch expects PayPal's transaction-based operating model will continue to benefit from an increasing share of e-commerce transactions. Additionally, as PayPal usage further expands beyond eBay Marketplaces, PayPal income and cash flow should further mitigate potential cyclicality in Marketplaces.
--Fitch expects eBay will maintain strong credit metrics and a conservative capital structure with core leverage (net of financing any consumer receivables) at approximately 1.0x and a disciplined approach to acquisitions.
--Fitch expects EBITDA and FCF of $3.2 billion and $2 billion, respectively, in 2010, to grow upwards of 10% in the current economic environment.
Credit concerns include:
--Risk of eBay strategically sacrificing profit margin and cash flow generation in its Marketplaces segment in search of higher revenue growth rates either through new pricing initiatives or acquisitions;
--Potential to separate PayPal from eBay, particularly as PayPal gains greater acceptance outside eBay Marketplaces. Fitch believes that as revenue at PayPal grows to potentially rival that of Marketplaces, PayPal would represent a stronger credit profile due to a more stable business, a more defensible market position and the business need for a strong rating to access cost effective capital. Note that Fitch does not believe that the current bond indenture has a material restriction on asset divestitures;
--Competitive dynamics negatively affecting the growth of the Marketplaces business and the increased acquisition risk inherent in the company's strategy of sourcing growth outside its domestic market;
--An increase in consumer lending services via growth of Bill Me Later (BML), including the possibility of debt issuance to support expected increases in consumer finance receivables;
--The longer term competitive threat to PayPal of new market entrants and new payment technologies.
As of Dec. 31, 2010, eBay's liquidity was strong and supported by approximately $5.6 billion of cash and equivalents plus $1.5 billion in availability under a $1.8 billion revolving credit facility maturing November 2012. In addition, eBay had $3.5 billion in short- and long-term investments. Fitch believes that a majority of eBay's cash and investment balance is located overseas and that mix of international to domestic cash should continue to increase going forward as a higher proportion of the company's cash flow is generated outside the U.S. due to stronger growth in international markets.
Availability under eBay's credit facility is reduced by $300 million outstanding under the company's $1 billion commercial paper (CP) program. The credit facility agreement requires the company to maintain a consolidated leverage ratio (debt/EBITDA) of less than 3.0x. Fitch anticipates that FCF and excess cash on the balance sheet including the potential future monetization of investments will be used for acquisitions, investments, and stock repurchases. The company currently has authorization from the Board of Directors to repurchase up to $1.9 billion in additional shares under a $2 billion authorization granted in September 2010.
Total debt as of Dec. 31, 2010 was $1.8 billion consisting of $300 million in CP outstanding; $400 million of 0.875% senior unsecured notes due October 2013, $600 million of 1.625% senior unsecured notes due October 2015 and $500 million of 3.25% senior unsecured notes due October 2020.
Fitch continues to rate eBay as follows:
--Long-Term IDR at 'A';
--$400 million 0.875% senior unsecured notes due 2013 at 'A';
--$600 million 1.625% senior unsecured notes due 2015 at 'A';
--$500 million 3.25% senior unsecured notes due 2020 at 'A';
--Short-term IDR at 'F1';
--$1 billion 4(2) CP program at 'F1'
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated August 13, 2010;
--'Liquidity Considerations for Corporate Issuers', dated June 12, 2007;
--'Cash Flow Measures in Corporate Analysis', dated Oct. 12, 2005;
--'Evaluating Corporate Governance', dated Dec. 12, 2007.
Applicable Criteria and Related Research:
Evaluating Corporate Governance
Cash Flow Measures in Corporate Analysis
Liquidity Considerations for Corporate Issuers