EBay to sell 65 percent of Skype for $1.9 billion
NEW YORK (Reuters) - Internet auction house EBay Inc plans to sell a majority stake in its online phone unit Skype for $1.9 billion to private investors including Silver Lake, a deal analysts said was worth more than expected but may curb eBay's growth potential.
The deal valued Skype at $2.75 billion but was well below the $3.1 billion eBay spent in acquiring Skype, and shares in eBay fell more than 2 percent after the news.
The company said the sale of a 65 percent stake allows eBay to focus on its auction service and its PayPal electronic payments service and avoid the potential risks of the initial public offering it had slated for Skype for next year.
Analysts said the sale to the investors, which included a venture firm run by Netscape co-founder Marc Andreessen, also highlighted concerns about the remainder of eBay, which faces stiff competition from rival Amazon.com Inc.
"It just returns the spotlight on the central issues eBay faces," said Atlantic Equities analyst James Cordwell, although he said the price was good for eBay.
Kaufman analyst Aaron Kessler said in a research note that selling eBay's fastest growing business would "clearly reduce the overall growth of eBay" and potentially lead investors to lower the amount they're willing to pay for eBay shares.
The group buying Skype includes London-based Index Ventures and the Canada Pension Plan Investment Board (CPPIB), along with Silver Lake and Andreessen Horowitz.
Susquehanna Financial Group analyst Marianne Wolk said the valuation was at the high end of her expectations.
"It eliminates the risk of the planned IPO and is a better price than many of us expected," Wolk said. The valuation is 24 times Wolk's 2009 estimate for Skype after-tax earnings contribution to eBay, or 4 times her revenue estimate.
John Donahoe, eBay's chief executive, had said in May that a $2 billion valuation would be low for the growing Internet telephone business.
More than half the purchase price was financed by equity, a source familiar with the deal said. Typically, private equity firms finance purchases heavily with debt, but it has become more expensive and harder to raise financing since the credit crunch has limited access to financing.
Some private equity deals, for example, have been struck with 100 percent equity and no debt.
A separate source close to the deal said Silver Lake is providing the majority of the equity capital and CPPIB is contributing a significant portion of the capital. Index Ventures and Andreessen Horowitz are smaller funds but making very substantial investments for their size, the person said.
Skype, whose 2008 revenue rose 44 percent to $551 million, charges for calls to regular telephones but provides free computer-to-computer voice, video and text services. It had about 405 million registered users at the end of 2008.
About two years after the purchase, eBay made a $500 million payout for the founders on top of the $2.6 billion it paid for the company in 2005. It also wrote down about $1.4 billion off the value of its investment as it conceded that the telephony unit does not fit with eBay's other businesses.
"Skype is a strong stand-alone business, but it does not have synergies with our e-commerce and online payments business," Donahoe said in a statement on Tuesday.
Susquehanna's Wolk said keeping a Skype stake made sense, as eBay could still benefit from Skype's growth.
"You don't know if there's an incentive to IPO the remaining stake downstream," she said.
EBay said the deal would close in the fourth quarter. The transaction is not subject to a financing condition.
JP Morgan, Barclays and RBC Capital markets advised Silver Lake and its investor group and committed to provide financing for the deal. Goldman Sachs advised eBay on the deal.
Shares in eBay were down 47 cents, or 2.1 percent, to $21.67 on Nasdaq compared with a 1.8 percent market decline. The company's shares have shot up from just under $17 in July on hopes of an improving business environment.
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