Fitch: eBay's ratings to stay with acquisition of GSI Commerce
Ratings agency, Fitch Ratings says it does 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.