Latin American e-commerce leader MercadoLibre (NASDAQ:MELI) announced today that as part of a $1.85 billion equity offering, payments giant PayPal (NASDAQ:PYPL) would make a $750 million investment in the company. In addition, venture capital company Dragoneer Investment Group would purchase $100 million in Series A perpetual convertible preferred stock. The remainder would be part of a $1 billion secondary stock offering, and underwriters will have the option to purchase an additional $150 million in stock, depending on demand.
It's important to note that in October 2016, e-commerce provider eBay (NASDAQ:EBAY) divested a massive 18% position in MercadoLibre after a decades-long partnership. PayPal's fresh interest in the company seems counter to eBay's decision to sell its significant stake just over two years ago. It may also illustrate that eBay's move was a mistake -- one that could have cost it $2.5 billion. Let's look back at the circumstances surrounding the divestiture to see if PayPal knows something eBay didn't.
A long and fruitful history
MercadoLibre and eBay had a collaboration going back to 2001. After a period when the pair competed for the same Latin American e-commerce customers, they called a truce. eBay gave MercadoLibre its Brazilian online trading platform iBazar in exchange for a 19.5% stake in MercadoLibre. In addition, the companies agreed not to compete in the region and to share best practices.
One of the developments that resulted from the partnership was the creation of MercadoLibre's payment solution, MercadoPago, which was modeled after PayPal. At the time, PayPal was owned by eBay. Many residents in Latin America don't have a checking account or even a credit card, which would have hampered adoption of online sales. This move proved to be a game changer for MercadoLibre.
Fast-forward to 2013, and the companies were once again becoming competitors. eBay was setting up digital shop in Latin America, as the non-compete agreements had long since expired. eBay launched a number of local language versions of its e-commerce platform, putting the company at odds -- and in direct competition -- with MercadoLibre.
eBay announced in October 2016 that it would sell its entire 18% stake in MercadoLibre. At the time, the company didn't provide much in the way of reasoning for divesting its stake. In a statement, eBay said:
We regularly review and actively manage our investment portfolio to ensure that our investments support the company's strategic direction and complement our disciplined approach to value creation, profitability and capital allocation. Against this backdrop, eBay has decided to sell the majority of its stake in MercadoLibre, Inc., an online commerce platform in Latin America. The sale will enable us to realize a significant gain on our investment, and we intend to use the net proceeds in a manner consistent with our capital allocation strategy.
Even in light of the company's corporate doublespeak, it's entirely plausible that the biggest contributor to the decision to sell was the growing competition with MercadoLibre in Latin America.
Birds of a feather
There are a number of obvious synergies between PayPal and MercadoLibre, and a recent look at the company's results tells the tale.
For the fourth quarter, MercadoLibre reported that its payments business, MercadoPago, continued to gain steam and is the fastest-growing segment of the company's business. The number of payment transactions grew to 126 million, up 72% year over year, resulting in record total payment volume (the total dollar amount of transactions) of $5.3 billion, up 23% compared to the prior year quarter. This was the first time the company topped $5 billion in payment transactions in a single quarter.
MercadoPago is seeing increased adoption at brick-and-mortar retailers and online stores, with transactions exceeding $2 billion for the quarter. MercadoLibre expects off-platform transactions to exceed those from its e-commerce operations in the very near future. The total number of payment transactions has grown in excess of 60% year over year for 16 successive quarters, illustrating the massive opportunity and the long runway ahead.
A costly decision
eBay pocketed a cool $1.37 billion from its sale of MercadoLibre, after spending about $146 million to acquire its stake, resulting a profit of $1.2 billion. While at first glance that looked like a pretty savvy deal, sometimes looks can be deceiving.
At the time of the divestiture, eBay sold its stake of MercadoLibre for about $168 per share. At the close of trading on Tuesday, those shares were fetching about $483. Had the company continued to hold its stake in MercadoLibre over the ensuing two and a half years, eBay would have reaped an additional $2.5 billion windfall.
Since the company didn't specifically say, we don't really know exactly why eBay sold its stake in MercadoLibre. At the time the company was divesting non-core assets, including the spin-off of PayPal the year before, to focus on its core business. Whatever reason eBay had for divesting its stake, it was an extremely costly decision.