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EBAY - eBay Inc.

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EBAY - eBay Inc.

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NEW YORK (MarketWatch) — PayPal has become such a colossal part of eBay’s business that its spinoff would virtually split eBay in half.

That’s the view of SNL Financial analyst Seth Shafer, who pointed out in a report Thursday that PayPal and Braintree racked up some $1.74 billion in net transaction revenue during the second quarter, slightly above eBay’s core marketplace, which posted transaction revenue of $1.72 billion.

“Spinning out the payments unit would almost split eBay in half, which illustrates just how much the online retailer depends on nonretail sources of income,” Shafer said.

He wasn’t alone in that opinion.

Morningstar analyst R.J. Hottovy told MarketWatch that a full separation of PayPal from eBay EBAY, -0.88% would “effectively split the business in half.”

In fact, Hottovy said PayPal is actually now worth more than both eBay Marketplaces and eBay Enterprises on a sum-of-the-parts basis.

PayPal has been eBay’s fastest-growing segment for several quarters now. In the second quarter, it surpassed 150 million active registered accounts and expanded merchant services total payment volumes for the fifth straight quarter.

The unit has also proven to be among eBay’s more innovative, with payment processing startup Braintree, acquired by PayPal last September for $800 million, launching a software tool last quarter that allows developers to integrate both Braintree and PayPal in apps in less than 10 minutes

What’s more, a majority of PayPal users don’t even access the service through eBay anymore. The payments segment recorded $55.05 billion in total transactions flow last quarter, up 29% year-over-year, according to eBay’s most recent 10-Q filing. Of that, just $14.68 billion was processed on eBay, while the remaining $40.37 billion was processed through other online merchants, some of which were likely direct eBay competitors.

While the payments group still has a lower take compared with other eBay businesses, and thus weaker margins and profitability, Shafer says recent financials prove PayPal would be sufficient as a standalone entity. In fact, a split might even help attract more merchants.
eBay’s roller coaster ride with PayPal in 2014

“E-commerce sites such as Amazon.com and Alibaba Group Holding Ltd. will be hesitant to fully integrate PayPal into their product as long as it is tied to the competition,” SNL’s Shafer said. “An independent PayPal could find itself in a more amenable business environment.”

EBay has long defended its decision to keep the two together by saying investors have made it clear it’s what they want for the time being. However, recent share prices might prove otherwise.

Shares of eBay were up as much as 5.5% on Aug. 21, the day reports of a potential deal resurfaced in The Information, and they have held onto those gains. While they are down 1% to $55.36 on Thursday, they are still up more than 5% since Aug. 22.

“Investors seem to consider the spinoff idea attractive,” Shafer said.

Neither eBay nor Carl Icahn, who owns 2% of eBay and was fighting for a PayPal spin-off before an agreement with PayPal stifled his calls in April, were immediately available for comment on this report.

EBay, on its second-quarter earnings call, did cave a bit to the idea, saying it remained open-minded to alternatives. Morningstar’s Hottovy said recent pressures on management may have prompted the c-suite to look back into at least a partial spin-off or joint venture.

“Obviously these types of rumors don’t make it to the public without some truth to them,” he said.

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