EBay CEO John Donahoe said on Wednesday that the e-commerce company could take on more debt as long as such a move does not threaten it’s “A” credit rating.
Donahoe also defended the combination of eBay and PayPal and played down the potential of the company’s same-day delivery service, eBay Now, during a talk at the Goldman Sachs Technology and Internet Conference.
Activist investor Carl Icahn recently bought a stake in eBay and has been pushing Donahoe and the board to spin off the PayPal payments business, arguing it would be worth a lot more as an independent company.
EBay has so far rejected the proposal. When the company initially disclosed Icahn’s proposal in January, it announced a new $5 billion share buyback plan. The move was designed to deflect potential criticism that eBay is not using its large cash position effectively enough.
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Icahn had been hounding Apple about the same issue but backed off recently after that company bought back $14 billion worth of its stock in a two week period following disappointing results.
On Wednesday, Donahoe was asked why eBay was not being more aggressive with its share repurchase plan.
Donahoe noted that eBay has about $3 billion in U.S. cash, $2 billion less than the size of its recently announced $5 billion buyback plan.
That suggests eBay may have to raise additional capital through borrowing and Donahoe noted that the cost of issuing debt is low at the moment.
“We could take on more debt but we think it’s important to maintain an A rating,” the CEO said.
When eBay announced its new buyback authorization, Moody’s Investors Service, a leading credit rating agency, said eBay’s A2 long-term rating was not affected.
“With the sharp increase in its repurchase authorization, the company is likely to use some debt funding,” Moody’s added.
Debt funding for about half of the new buyback, or $2.5 billion, would leave eBay’s adjusted debt-to-EBITDA ratio in the low 1x range, which is consistent with the rating agency’s expectation, Moody’s said.
“However, Moody’s views the increased levels of share buybacks as marking a potential shift in eBay’s traditionally conservative financial policies,” the agency added.
During Wednesday’s discussion, Donahoe also reeled off a list of reasons why eBay and PayPal should stay together. However, he suggested that if circumstances changed, the company would be open to a separation.
“If and when synergies run their course we will be rational in the same way we were rational with Skype,” Donahoe said.
EBay bought Skype, a big Internet-based calling service, for more than $2 billion in 2005, but it realized that the business did not fit well with the online marketplace or payments. It sold most of Skype to a group of investors and then Microsoft bought the whole company for $8.5 billion in 2011.
Donahoe also spoke about the limitations of same-day delivery – a hot trend in e-commerce. The company has a service, called eBay Now, which delivers items in as little as an hour.
Donahoe said eBay Now has received too much media attention, given the scope of the operation. “This is not a major independent business line we want to grow,” he added.
The notion of fast and convenient delivery is attractive to wealthier consumers, but most shoppers are willing to take more time to search for better prices.
“In this room, we have money but no time,” Donahoe told the audience, which included fund managers, Wall Street analysts and venture capitalists. “But the bulk of consumers have more time than money and are willing to search for value, or they like shopping as a source of entertainment.”
Date: February 12, 2014