PayPal Holdings Inc.'s largest-ever deal marks its entry into the front-end of the shopping experience.
The payments giant agreed to acquire shopping and rewards platform Honey Science Corp. for $4 billion in cash in the fourth-largest fintech purchase this year. The deal marks a "new breed" of acquisition for PayPal, one that allows it to engage with users when they first start searching for an item to buy online instead of just at checkout, said Bank of America Merrill Lynch analyst Jason Kupferberg.
Historically, PayPal has mostly acquired payments companies. Its other large purchases recently include Swedish payments company iZettle AB, which gave it in-store capabilities in Brazil, Mexico, and several countries in Europe, and money transfer and remittance company Xoom Corp.
In a Nov. 20 note, Kupferberg called the deal "strategically compelling," adding that PayPal is "uniquely positioned" to leverage Honey's product to boost revenue.
Still, some analysts seemed wary of the price. The all-cash purchase represents 20x Honey's current-year revenue, assuming its 100% growth from 2018 was sustained in 2019. At $4 billion for 17 million users, PayPal paid about $235 per Honey user. Looking at a similar deal from 2014 in which Rakuten Inc. acquired Ebates Inc. for close to $1 billion, Rakuten paid about $400 per user for Ebates' 2.5 million customers.
Bernstein analyst Harshita Rawat called the price "somewhat rich," while MoffettNathanson analyst Lisa Ellis said it was "not egregious."
But Honey's products cater to less than 20% of PayPal's total addressable market, Rawat said in a Nov. 21 note. About 79% of Honey's users are women, and 70% of its users are millennials, PayPal CFO John Rainey Jr. said on a Nov. 20 call to discuss the deal. Honey is specifically focused on online retail and largely targets U.S. customers, which limits how well it will mesh with PayPal's global strategy unless the payments giant is able to expand the product into new geographies or demographics, Rawat said.
Wolfe Research analyst Darrin Peller believes the deal will pay itself back after a few years. Right now, PayPal customers only use their PayPal or Venmo apps about 40 times each year. If Honey can get those customers to use the apps just two or three more times each year, Peller estimates that could bring in an additional $500 million of incremental payments revenue.
The deal's true value is how Honey can increase customer interactions with PayPal, not Honey's overall revenue contribution, the analyst said in an interview. PayPal's executives on the call to discuss the deal said they want consumers to use their apps daily.
"It's all about engagement," Peller said.
The analyst expects the deal to have a "flywheel effect," where consumers become Honey members, have access to Honey's 30,000 merchants, and get rebates deposited into their PayPal or Venmo apps, encouraging them to then spend again. Honey works with merchants across the shopping spectrum, including Walmart Inc., Expedia Group Inc., Macy's Inc. and Priceline LLC. Honey could also simply advertise promotions within the PayPal and Venmo apps, driving traffic on the apps as users learn what discounts are available.
Honey's consumer engagement tools will also help strengthen PayPal's suite of services for merchants, MoffettNathanson's Ellis said in a Nov. 21 note.
"As the 'wallet wars' wage on, online checkout commoditizes, and PayPal's core online checkout franchise faces increasing competition, PayPal's most important strategic imperative is to continue strengthening its two-sided network by enhancing its merchant and consumer value propositions," Ellis said.