eBay planning spin-off of Skype through IPO

SAN FRANCISCO, USA: eBay Inc plans to spin off its Skype unit, acknowledging that the Web telephone service does not fit with the rest of the company, in an indictment of former CEO Meg Whitman's acquisition strategy.

eBay, whose shares rose 3 per cent in after-hours trade, said on Tuesday it was planning an initial public offering for Skype by the first half of 2010, a move widely seen as putting a 'for sale' sign on the unit to fetch potential buyers.

Two people familiar with eBay's thinking said the online auction company could seek substantially more than $2 billion for Skype. But some analysts doubted that it could fetch so much in current markets.

The San Jose-based eBay bought Skype in 2005 for $2.6 billion, in what was its biggest ever acquisition. John Donahoe, who became eBay chief executive a year ago, has vowed to evaluate whether the telephone service was a good fit with the rest of the company, which includes Web payments service PayPal along with its core auctions business.

"We believe operating Skype as a stand-alone publicly traded company is the best path for maximizing its potential," Donahoe said in a statement on Tuesday.

Many on Wall Street raised eyebrows when Whitman purchased Skype, skeptical of the high price and eBay's claims that its customer base of buyers and sellers would embrace Web phone calls.

"That Skype didn't fit into the rest of the business was apparent from day one," said RBC analyst Stephen Ju.

"The book value of this asset is about $1.7 billion. It wouldn't surprise me if they would try to get something like $2 billion," he said. That implies a roughly 10 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) multiple based on Skype's 2011 revenue target of $1 billion and its current operating margins of 20 percent, he added.

Ju noted it was hard to put a value on a Skype IPO given the uncertainty over the state of the market in 2010.

Private equity interest

Although eBay announced plans to spin Skype off into an independent public company, two sources familiar with the matter said it is open to a sale of Skype.

Skype co-founders Niklas Zennstrom and Janus Friis have recently contacted several private equity firms, including Kohlberg, Kravis, Roberts & Co, Providence Equity Partners and Elevation Partners, in an effort to team up and make a joint bid for the unit, people familiar with the matter said.

But the buyout shops have not evinced keen interest so far, the sources said. Specific proposals, including how much money to commit for any potential deal, were not discussed with all the private equity firms, one of the sources said.

The New York Times reported last week that Skype's co-founders were trying to raise $1 billion from private investors, and discussing one case in which eBay itself would put up the rest of the financing in the form of a seller's note to complete a deal worth more than $2 billion.

"We're not soliciting bids, we're pursuing an IPO," said eBay spokesman Alan Marks, adding that market conditions will determine the timing of the deal, but that it would likely be completed by the first half of 2010.

EBay hired investment back Goldman Sachs to manage the IPO process, according to a source close to eBay.

IPO market unclear

Skype, which posted revenue of $551 million in 2008, allows international and local calls through the Web. Fellow Skype customers can call each other for free, a strategy that has helped to spread the service.

However, the U.S. IPO market remains slow, with most bankers only expecting a meaningful recovery in 2010. There have only been four IPOs since August and so far in 2009, IPOs measured in dollars are down 93 percent over the year ago period, according to Thomson Reuters data.

"The very first thing that I have to say is market conditions currently would not support an IPO of Skype," said Commresearch analyst Gregory Lundberg. "2010 will be equally questionable unless the business completely changes course with the launch of the Blackberry and iPhone applications."

Still, a Skype announcement has been eagerly awaited, said Morningstar analyst Larry Witt.

"Ebay has had a lot of heat because of the acquisition for a while," Witt said, adding that money could be reinvested into the core business or returned to investors.

"As long as they don't go out and make other bad acquisitions that have no synergy," he cautioned.

Witt said eBay would love to get at least $1.7 billion "so they don't have to take another writedown, just to save face."

EBay shares rose 3 percent to $14.85 in after-hours trade from their Nasdaq close of $14.38, down 2 percent.