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October 06, 2008

Big eBay news this am - layoffs, acquires BillMeLater (gulp)

This morning, eBay made a major multi-faceted announcement and held a conference call with analysts.

First, eBay is laying off 10% of its employees as has long been rumored. This is 1000 employees, many temporary and contractors.  This will result in $150m in annualized savings.

eBay then did a good job of lumping in a bunch of other announcements so not much attention was given to the layoffs.  In fact no information was given to the departments or nature of the folks impacted.  We'll keep an eye out for that information as it becomes available as sellers are very concerned about impact to customer service (buyer and seller).  eBay is going to take a $70-80m charge for the layoffs.

Secondly, eBay confirmed Q3 guidance, with a low-end revenue and high-end EPS view.

Thirdly, eBay announced some classified sites in Denmark for $390m.

Lastly, and definitely the biggest (and in my mind riskiest) announcement today is that eBay has acquired BillMeLater (BML).

BML is an interesting business with perhaps deeper retailer checkout penetration and TPV than off-eBay paypal.

Background on BML
BML has had a great business over the last 3 years. BML really started ramping up in 2006 and in holiday season 2007 hit its stride by offering consumers off-credit-card credit on the fly.  The way it works is a consumer goes to checkout and BML is there as a mark beside Visa/MC/Amex/etc.  When the consumer chooses BML, they enter their SSN and then are either approved or not approved.

For many consumers, if they have a high enough score, they are given 'super sized' approval (e.g. $100 in cart, $200 is approved) and thus retailers love it because it improves the average order value.  Consumers love it because:

  1. It's safe - only your SSN is transmitted (personally that freaks me out more than my credit card)
  2. It's 'free credit' - it isn't on your credit cards so you either
    1. Keep room on your card or
    2. if your card is maxed out, you get effectively another credit card

Industry lore is that eBay tried to buy BML last year, but BML rebuffed and said they wouldn't sell for less than $2b.  eBay decided to compete by adding similar functionality to Paypal with something called PayLater (PPPL).    As best I can tell, PPPL hasn't had any traction as it was too conservative only working on transactions in the $50-100 range and was only offered in express-checkout which has very little retailer adoption.

On the back-end, BML acquires loans from some institutional company and that's the piece I don't think anyone understands and wasn't really illuminated in the call.

BML stats
Some datapoints revealed today about BML's biz:

  • BML is offered by 75 of the top 200 merchants in the IR500. 
  • BML's Transaction Payment Volume (TPV) is $1b/yr (2008E) vs. 800m last year (25% y/y)
  • BML's revenues are estimated to be $130m this year (meaning eBay effectively paid  7x revenue) (see my risk factors below)
  • BML has a 46% repeat user rate (like a credit card once consumer gets the BML credit, if they don't use it, they can come back)
  • BML has 4m registered users (vs. Paypal's 80m+)
  • BML has a 12.5% take rate on TPV
  • BML's profitability wasn't really detailed

The Acquisition

  • eBay is acquiring BML for $820m and $125 in options
  • The deal will add $150m in 09, and dilutive by $.06 on EPS
  • Will be accretive by 2011 (wow, long time for a payoff)
  • eBay will be assuming a $550m book of receivables (yikes, that sounds like almost all of last years TPV).
  • John Donahoe said the acquisition is less than half it would have been a year ago on the conf call.

My Risk concerns around BML
BML was huge last holiday season based on our data and there's a real business there and overall I think it does make sense to be part of Paypal, long-term and it does achieve some of the strategic pieces that Donahoe covered on the call (extend to larger retailers, etc.).

However, I have three big areas of concern around BML:

  • Short-term risk: In the eBay deck this am, they showed the 2008E revenue for BML at $130m.  As with any retail-based business, I'm sure at least 30% if not 40% of their revenue comes in Q4, which is front of us. If we have a slowdown, I'd guesstimate that there's a good 20-30m at risk in that 08E.
    • They then guided 150m in revenue next year for BML. Why would eBay buy something growing at 25% and then slow it down vs. accelerate?
  • On the front-end (consumer facing) , I'm sure this holiday demand for 'cheap' credit will be extremely high as consumers are maxed out on their houses and credit cards.  So BML will have a lot of requests for transactions.  However, they may need to really jack up the level at which they give credit and if they don't manage that right they could either have lower than desired TPV or higher with more risk involved.
    • A second issue with the demand side is that as they raise the bar on credit, it results in a poorer consumer experience.  Right now most consumers get the credit, but imagine only 5% get it, that's a bad buyer experience and BML could get a retailer backlash if consumers put that bad experience back to the retailer.  The BML CEO admitted they do this on the call.
    • Thirdly on the front end (consumer) as consumers fall over due to the economic issues, you could see defaults rise substantially.
  • Last and certainly not least.  BML on the back end (commercial lending - b2b) takes credit and issues it to consumers on a per-transaction basis.  Think of it as taking big chunks of credit ($550m out there right now I guess) and then chops it into little $100-500 chunks.  It's no secret that the credit markets are a total trainwreck and eBay just got itself squarely involved in a credit 'middle man' business.
    • I'm guessing eBay will fund this off their very healthy balance sheet and/or leverage their credit facilities.
    • What if BML is integrated in Paypal (who has $60b in TPV/yr as of Q2) and let's say they get a great adoption of 10%. That's $6b of credit.  While eBay has a pristine balance sheet, I don't know what would happen if something like this happened.  Of course eBay+BML can control this outflow of credit, but it's an interesting and important exercise to look at and understand the scale of the back-end credit piece eBay could have just bitten off.

On the call, the BML CEO referenced their years in credit as being able to mitigate this, but that didn't really allay my concerns as we face a credit world unlike any ever seen  before so how do you model that?  The CEO also insisted that it isn't credit, which didn't make any sense to me - if it quacks like a duck and walks like a duck....

I left the call feeling like this was a bailout of BML and concerns around eBay+Paypal getting into the credit business in a BIG way.  I don't know how much experience they have with that and even if they had tons of experience, they are now subject to the crazy gyrations of the credit markets.  e.g. LIBOR going up now matters to eBay and historically nobody really cared. 

Integration
The trick as with any M+A is for eBay to integrate this right.  For example, if they shutter BML and try and offer it as PayPal PayLater, that wouldn't be smart.  The Paypal team has a better history of M+A (verisign, etc.) than the rest of eBay so I think integration risk is pretty low here.

I wonder if they will report both TPVs or try to blend them and I also wonder if they will push for a Q4 integration - seems unlikely as the deal isn't even closed yet so they can't begin in earnest yet.

Amazon and BML
Last December, Amazon invested in BML and now offers it as an option.  It's going to be interesting to see if Amazon can get BML off the payment options before the holidays or will they chose to continue to partner here?

eBay platform and BML
It will be interesting to see if eBay can get BML out for the holidays and if they pass any of the benefit (free transaction payment) on to sellers or if they hose sellers over and charge them Paypal rates for something that would normally be free off-ebay.

The Bottom Line
The layoffs will probably be viewed as net positive as they will reduce costs and improve profitability going into some severe Q4/09 headwinds. The BML acquistion is one that will have to be watched closely long-term.  Short-term given the unbridled fear of the word 'credit' right now, I expect the market to punish eBay severely for this acquistion and I suspect eBay will lose much more than the $1b it paid BML in market cap in the short term as investors flee in fear from the dreaded C word.  The only thing worse timing-wise eBay could have done is announced some kind of sub-prime lending effort.

Long-term I definitely agree there are synergies in the two businesses, but I don't think we'll see them until Q409 and with the guidance BML won't even be accretive until 2011, so this is a very long-term play and right now the market isn't thinking past lunch, much less 2011.  We'll be tracking the integration very closely as it will have implications for eBay sellers both on and off eBay.

SeekingAlpha Disclosure: I am long eBay and Google


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