Late last month, investors learned that e-commerce site eBay (NASDAQ:EBAY) would be selling StubHub to Viagogo for $4 billion in cash. The deal sends StubHub back to its co-founder Eric Baker, who is CEO of Viagogo. And although eBay has made a good return buying the company at $310 million back in 2007 and selling it back to him for more than 10 times that amount, it's still unclear what this means for eBay's future and whether it was a good decision.
Was selling StubHub the right move?
The one obvious positive from this move is that it gives eBay more than $4 billion in cash. However, given that the company already has nearly $900 million of cash on its books and generated just under $3 billion in free cash flow over the trailing 12-month period, it's hard to see a pressing need for such a big war chest. The company hasn't been bleeding money, nor is it in danger of running short of funds.
Since it doesn't meet a pressing need, the deal raises a lot of questions, including the motivation behind it and future plans for all this extra money. The company's press release answered none of those questions. Interim CEO Scott Schenkel, who has been on the job since September, stated that the company believes that "this transaction is a great outcome and maximizes long-term value for eBay shareholders." This ambiguous statement says nothing about how this will translate into growth or help eBay create more value.
It was a bit puzzling to hear the company state that "We firmly believe in the StubHub business, and we are excited about its future growth potential with Viagogo as its owner." After all, if there was a lot of growth potential with StubHub, eBay certainly could have used it -- in the past year, its revenue of $10.9 billion is up only modestly up from the prior-year tally of $10.6 billion. Growth is something eBay is in desperate need of, and that makes the move to sell StubHub all the more confusing ... unless, of course, the company has plans for a bigger acquisition. The concern is that eBay might have succumbed to pressure from investors who wanted to see it sell StubHub.
Why listening to activist investors could be a bad sign
Hedge fund Elliott Management, which has invested $1.4 billion in eBay, has put pressure on the company to sell its holdings of StubHub, stating in a press release earlier this year that "StubHub and eBay's portfolio of Classifieds properties represent high-value, strategic assets that are worth meaningfully more than the value currently being ascribed to them as part of eBay."
If that's true, it suggests eBay's management has done a poor job of managing its assets and increasing their value. That should have investors worried. But if it's not true and Elliott Management influenced the company to sell StubHub, that might also be a big concern, since StubHub accounted for 12% of eBay's net revenue and was a significant piece of the overall business.
What does this mean for investors?
eBay's management isn't clear about how the StubHub sale will help drive value or fix the company's growth problems. With StubHub no longer in its portfolio, eBay needs to find a way to enhance its existing marketplace or find another asset that can add value and grow the business.
But where the company will go from here is still a big question mark. The tech stock might be trading at a modest valuation -- 13 times forward earnings and 9 times book value -- but without a clear path to long-term growth, investors should be wary of investing in eBay right now.