PayPal Holdings Inc. is making a $750 million minority investment in MercadoLibre Inc., Argentina's e-commerce powerhouse with a budding digital wallet segment.
Although PayPal's COO William Ready would not comment on further updates related to the investment while speaking at a conference March 12, one analyst expects the companies to soon announce a longer-term, more extensive partnership. After speaking with PayPal's management, MoffettNathanson analyst Lisa Ellis called the investment "a base hit, with [the] potential to be a home run" in a note the same day.
At a minimum, the investment provides PayPal with a "seat at the table" in Latin America's $50 billion online retail market, as PayPal will have an observing seat on MercadoLibre's board, Ellis said. But it also opens the door to an M&A opportunity: A partnership might lead PayPal to acquire MercadoPago, the company's digital payments solution. If that happens, PayPal would add 30% to its international users, Ellis said.
This investment is one of PayPal's largest since the fintech separated from eBay Inc. in July 2015. PayPal executives in 2018 detailed plans to pursue several deals valued between $1 billion and $3 billion in the next several years. The company has about a $10 billion stockpile of cash to spend and has indicated it might look at markets including India, Indonesia, Brazil, Mexico and possibly China for future growth. Two aspects of PayPal's core growth thesis are international expansion and new or expanded partnerships, especially internationally, Ellis said.
MercadoLibre shares jumped more than 20% after the company posted its fourth-quarter 2018 earnings. Following the earnings release, analysts compared MercadoPago to an early PayPal, and HSBC's Ravi Jain estimated that the segment could be worth as much as $8 billion on its own, Bloomberg reported.
In November 2018, the Argentina-based company received approval to offer financial services in Brazil. And now Mexico's central bank is contemplating the launch of a state-backed mobile payment system with Amazon.com Inc. and MercadoLibre, two of the country's biggest online retailers.
"Latin America is a very interesting growth market for us," PayPal's Ready said at the Wolfe Research Fintech Forum. "No specifics to talk about [with MercadoLibre]. But generally, just as we've done with other major partners, we think there [are] things we can do to make buyer and seller experiences better."
In a separate agreement March 11, an affiliate of Dragoneer Investment Group LLC agreed to purchase $100 million of MercadoLibre's Series A perpetual convertible preferred stock. MercadoLibre said it intends to offer US$1 billion of common stock, granting underwriters a 30-day option to purchase up to $150 million of additional shares. The PayPal and Dragoneer investments are contingent upon the closing of the public offering and are expected to close at the same time or shortly after the public offering.