eBay Grabs GSI, Challenges Amazon - Analyst Blog

eBay Inc (EBAY) has announced its second largest acquisition ever (the largest was Skype for $2.6 billion, which eBay subsequently sold off). The target, GSI Commerce Inc. (GSIC) is a provider of behind-the-scenes ecommerce services.

eBay has offered to pay $29.25 a share, or $2.4 billion for the company, a 51% premium to Friday's closing share price. The deal is not final, since the agreement provides for a 40-day period, during which GSI may solicit proposals from others.  

The acquisition brings on board important fulfillment services, including packing, shipping and interactive marketing. It also means that eBay will get to deal with GSI's 180-strong retailer partners, including Toys R Us, Bath & Body Works, Radio Shack, Ace Hardware, American Eagle Outfitters,Aéropostale, Timberland, Mattel, Zales and Major League Baseball.

eBay has been going full-throttle trying to rebuild its image, woo large sellers and improve the buying experience on its websites. The company started out as an auction site, bringing together small buyers and sellers, so it was deficient in many respects when it came to attracting bigger sellers/buyers.

As a result, it was relatively easy for online book-selling giant Amazon.com (AMZN) to pick up a large share of the fast-growing e-tail market. Amazon had all the infrastructure and support services that made buying or selling on its properties comfortable. This brought many players, sometimes at eBay's expense.

The GSI-eBay combination will now boast the core capabilities that enabled Amazon to cater to the larger sellers and thus build its position in the ecommerce market. Therefore, eBay will be in a much better position to make headway in the ecommerce market and also compete more effectively with Amazon. eBay's seller base will actually be very broad-based following the acquisition, since it already specializes in small accounts and is now gathering expertise for dealings at larger accounts.

Forrester estimates that the U.S. ecommerce industry generated $176 billion in 2010 and may be expected to grow into a $279 billion market by 2015. The acquisition will enable eBay to capitalize on this growth opportunity.

eBay plans to sell off GSI's licensed sports merchandise business and 70% of shopping sites RueLaLa.com and ShopRunner.com, since they are not a core part of its future growth plans. Instead, a new holding company, headed by Michael Rubin (currently GSI's CEO and founder), would take over these assets. GSI would operate as a separate business unit through 2011, after which it would be integrated.

eBay said that the $2.4 billion, which equates to 1.76X GSI's revenue in the trailing twelve months, or 23.1X its EBITDA, would be funded with cash on hand and debt. eBay has $6.62 billion of cash on its balance sheet and raised $1.8 billion of debt in the last quarter.

The acquisition will have a 30-34 cent negative impact on eBay's GAAP earnings for 2011 (previously forecasted at $1.56 to $1.61 per share) but would be accretive in 2012.

eBay also revised its revenue and earnings expectations for the next few years. It now expects to generate additional revenue of around $1.2 billion by 2013. Operating earnings growth for the period was raised from 11.5% (at the midpoint) to 14%. Free cash flow is also expected to be higher.

eBay shares lost $1.36 and Amazon shares lost $1.63 yesterday. However, while eBay shares carry a Zacks #2 Rank, implying a short-term Buy rating, Amazon shares are ranked #3, implying a short-term Hold rating.