eBay will not be the same without PayPal and most analysts agree they have an uphill battle long-term due to intense competition. However, eBay is expected to divest its Enterprise business in a deal valued at $925 million, according to Forbes.
Fitch Ratings has downgraded the long-term ratings including the long-term Issuer Default Rating (IDR) to ‘BBB’ from ‘A-‘ in connection with the separation of PayPal, and removed the rating from Rating Watch Negative. In addition, Fitch has affirmed the short-term ratings at ‘F2’. Fitch’s actions affect $10.6 billion of debt including the $3 billion revolving credit facility (RCF). A full list of ratings follows at the end of this press release.
The ratings and Outlook reflect Fitch’s expectations for more aggressive financial policies following the separation of PayPal, including higher total leverage (total debt-to-operating EBITDA) to support intensified share repurchases, given eBay’s diminished strategic rationale for maintaining strong investment-grade ratings. Fitch expects eBay will moderate debt to maintain total leverage in the 2x-3x range and estimates total leverage was approximately 2.6x pro forma for the separation, versus 1.4x prior.
Fitch anticipates intensified share repurchases through the intermediate term, given eBay’s significant cash balances and free cash flow (FCF), as well as slowing top- line growth. Fitch expects that share repurchases will highlight the company’s capital allocation strategy during the rating horizon. The company upsized its repurchase program by $1 billion following the recently announced sale of the Enterprise business for $925 million. Beyond the intermediate term, Fitch expects cash location may limit share repurchases to offset dilution.
Fitch expects competitive pressures and challenges penetrating mobile markets in the faster growing developing economies may constrain longer-term top-line growth to the low single digits. In the short-term, Fitch expects eBay will resume positive FX-neutral organic revenue growth following the security breach-driven password reset and Google’s algorithm changes in 2014. Fitch expects eBay’s investments in incentives to attractive lapsed users, and structuring and cataloguing merchandise will limit friction associated with future algorithm changes.
Fitch expects profitability will remain strong compared to retail competitors, however, with operating EBITDA near 40%, driven by lower costs associated with the company’s restructuring actions in late 2014-early 2015. Fitch believes the company’s brand, unique offering, and focus on small- to medium-size business (SMB) and consumer seller spaces support rich profit margins. As a result, we expect robust annual FCF of more than $2 billion, as capital intensity moderates somewhat to approximately 8% of revenues.
The ratings and Outlook are supported by:
–Fitch’s expectations for significantly higher profitability versus retail industry peers and low capital intensity resulting in strong and consistent FCF;
–Significant financial flexibility supported by $8.5 billion of cash and equivalents (including investments as of June 30, 2105) and the expectation of $2 billion to $2.5 billion of annual FCF generation;
–eBay’s leading e-commerce platform, especially for specialized product offerings, with strong brand recognition and technology capabilities;
–Large, active accounts base and focus on serving small- to medium-sized sellers provides significant customer diversification.
Ratings concerns center on:
–Fitch’s expectations for revenue growth challenges from increased mobile penetration within the context of recovering from the most recent search engine optimization (SEO) changes by Google and cyber-attack-driven password reset in 2014;
–Fitch’s expectations for more aggressive financial policies over the longer term, given reduced strategic rationale for strong investment grade ratings following the separation of PayPal, likely exacerbated by significant offshore cash and FCF;
–eBay’s significant reliance on PayPal, which processes 80% of the transactions on eBay and with whom eBay has entered into a service and data sharing agreement requiring cash payments should certain revenues thresholds not be met;
–Fitch’s expectations for ongoing challenges in gaining e-commerce platform traction in faster growing developing markets with rapid mobile adoption.
–Low-single-digit FX-neutral revenue growth through the intermediate term, driven by increasing e-commerce penetration and eBay’s recovery from the search engine change and security breach in 2014;
–Profitability remains consistent with operating EBITDA margin near 40% with lower fixed costs from headcount reductions offsetting pressured take-rates;
–Substantial step-down in 2015 related working capital following separation of PayPal;
–Capital spending remains elevated to accelerate growth opportunities, including investments in structured, catalogued merchandise;
–Incremental debt issuance to support significantly higher share repurchases and acquisitions.
Positive rating actions could occur if:
–Management commits to curtailing share repurchases and managing debt to maintain total leverage closer to 2x; or
–There is sustained low- to mid-single-digit FX-neutral organic revenue growth, supporting eBay’s mobile strategy and resulting in higher and more predictable FCF.
Negative rating actions could occur if Fitch determines:
–Operational weakness or more aggressive financial policies will result in total leverage sustained above 3x; or
–There is sustained negative FX-neutral revenue growth beyond recovering from the 2014 cyber-security attack driven password reset and search engine changes, indicating an uncompetitive mobile strategy.
eBay’s liquidity was strong at separation and supported by:
–$8.5 billion of cash and equivalents.
–$3 billion undrawn RCF expiring November 2016, which Fitch expects the company will reduce in the near term given its reduced revenue base.
Fitch’s expectations for more than $2 billion of annual FCF also supports liquidity.
Total debt as of June 30, 2015 was $7.6 billion and consisted of:
–$600 million 1.625% notes due October 2015;
–$250 million 0.7% notes due July 2015;
–$1 billion 1.35% notes due July 2017;
–$450 million floating rate notes due July 2017;
–$400 million floating rate notes due January 2019;
–$1.1 billion 2.2% notes due August 2019;
–$500 million 3.25% notes due October 2020;
–$750 million 2.875% notes due August 2021;
–$1 billion 2.6% notes due July 2022;
–$750 million 3.45% notes due August 2024;
–$750 million of 4.0% notes due July 2042.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings for eBay:
–Long-term IDR to ‘BBB’ from ‘A-‘;
–Senior unsecured RCF to ‘BBB’ from ‘A-‘;
–Senior unsecured notes to ‘BBB’ from ‘A-‘;
Fitch has affirmed the following:
–Short-term IDR at ‘F2’; and
–CP program, which Fitch anticipates will be reduced in connection with the separation, at ‘F2’.
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