MercadoLibre (NASDAQ:MELI), the Latin American e-commerce and payments powerhouse, announced that it will raise as much as $1.85 billion in a secondary stock offering. This will include equity investments from payments giant PayPal (NASDAQ:PYPL) and venture capital company Dragoneer Investment Group.
Let's dig into the details to see why this is a good move by MercadoLibre -- and what it means for investors.
The fine print
After the market closed Monday, MercadoLibre announced a secondary offering of $1 billion, with the option for the underwriters to purchase up to $150 million in additional shares. In a separate agreement, the company revealed that PayPal would make a strategic investment in the company with an equity stake worth $750 million. Also, Dragoneer will purchase $100 million in Series A perpetual convertible preferred stock.
MercadoLibre said it plans to use the funds to "continue expanding its e-commerce platform, to strengthen its logistics infrastructure, and to invest in solutions that further solidify the company's position as a powerful provider of inclusive end-to-end financial technology and payments solutions."
There couldn't be a better time for MercadoLibre to pursue a secondary offering, as the company is issuing the new shares from a position of strength. The stock touched an all-time high on Monday in the hours prior to the company's announcement.
What it all means
A secondary offering is often viewed as a negative by investors, as it dilutes the ownership stakes of existing shareholders. This perception typically causes the stock to fall in the wake of these announcements. Based on the current stock price and MercadoLibre's market cap of $21.5 billion, the result of the equity sales announced will dilute existing investors' shares by about 8.85% (not including the impact of the Dragoneer deal, which is a bit harder to gauge).
Specifically, the secondary offering will be dilutive by about 4.7%, or as much as 5.4% if the option for the $150 million of additional shares is exercised by the underwriters. PayPal's stake will further dilute investors by about 3.5%.
Investors haven't reacted poorly to the announcement by MercadoLibre thus far; the stock has remained relatively flat to slightly down as of this writing. That may be the result of the stake taken by PayPal and the synergies the two companies could realize by collaborating.
Dan Schulman, PayPal's president and CEO, pointed to the tremendous growth of digital commerce in Latin America, saying that MercadoLibre is poised to benefit from the ongoing trend. "We've been impressed with the digital commerce and payments ecosystem Marcos [Galperin, MercadoLibre's CEO] and his team have built," Schulman said. "We see great opportunities to integrate our respective capabilities to create unique and valuable payment experiences for our combined 500 million customers throughout the region and around the world."
MercadoLibre has seen massive success with its MercadoPago payment system, which has become so popular in Latin America, it moved off the company's e-commerce platform and is being used by a growing number of online stores and brick-and-mortar retailers.
PayPal will be able to mentor MercadoLibre and help the Latin American e-commerce giant to further leverage the growth of its payments solution. Investors should view this as a huge vote of confidence from PayPal and "a strong endorsement of MercadoLibre's payments platform from the global leader in digital payments," according to BTIG analyst Marvin Fong.
Dragoneer may not be a household name, but the venture-capital fund has invested in a host of well-known start-ups such as Uber, Instacart, DoorDash, Chime, and India's Flipkart, which is majority owned by Walmart. With its successful track record of choosing investments, Dragoneer's interest is also a positive sign for MercadoLibre investors.
A shared history
When MercadoLibre was still in its infancy, eBay owned a 19.5% stake in the company and agreed to share best practices with the fledgling e-commerce operator. As part of that mentorship, eBay helped MercadoLibre develop its payment system which was modeled after PayPal -- then owned by eBay.
eBay eventually spun off PayPal in July 2015, and it sold off its stake in MercadoLibre in October 2016. It seems somehow fitting that PayPal would now have a stake in a company that was inspired by its own early success.
MercadoLibre has faced a number of challenges recently and has taken steps to solidify its position in advance of Amazon.com's encroachment into its backyard. When MercadoLibre reported its fourth-quarter results, the company had more than $440 million in cash on its balance sheet, so it wasn't like there was a pressing need for cash.
With more than $2 billion available after the secondary offering, MercadoLibre will be better positioned to compete with Amazon while continuing to expand its hugely successful payments business.