Now that eBay has found a buyer for a 65 percent stake in Skype, the question on everyone’s mind is did they get a good price? The private equity investors buying the stake are paying around USD 2 billion for the stake, giving Skype a total value of USD 2.75 billion.
To calculate the value of Skype, the preferred method in the financial world is DCF, discounted cash flow. The estimated future free cash flow of the company is discounted using the weighted average cost of capital. This makes the DCF model highly dependent on the input values, including the owner’s plans for the company and its assets. How much will be invested? What are the sales and marketing plans? Are there synergy possibilities with the new owner’s activities? Is integration with another company required? Will the management be replaced? And this doesn’t even consider any skeletons in the closet, such as the ongoing lawsuit between eBay and the founders of Skype over rights to the VoIP service’s core technology. Skype is dependent on a piece of software called Global Index, which is controlled by Joltid, a company owned by the Skype founders. Ebay pays a licence fee, but the two parties have failed to reach an agreement on a price for extending the agreement. It’s unclear how this problem was factored into the sale price for Skype.
So the answer to the million-dollar question of what is the right price for Skype is: we can’t know. Still, this doesn’t stop investors from employing a number of methods to evaluate the purchase price. To start with we can look at the price Ebay paid and how the value of Skype has changed since then. Ebay bought Skype in 2005 for USD 2.6 billion, plus an earn-out of USD 1.5 billion. As the company did not meet all the performance targets in the earn-out, the subsequent payment was less, and in total Ebay paid USD 3.1 billion. It later wrote down the value of Skype by USD 1.4 billion. This leaves a book value of USD 1.7 billion for the company. At the time of the takeover in 2005, the price was already considered on the steep side – an opinion later substantiated by the write-down. Ebay is obviously not bothered by this, as it has now sold Skype at a value of USD 2.75 billion.
Another way to look at the value of the takeover is multiples, such as the price-earnings ratio. While we know the purchase price, less information is available on Skype’s earnings. A few facts already public: 1) Skype had 480.5 million registered users at the end of June, up 42 percent from a year earlier. A year ago, the annual growth rate was 58 percent. We can assume not all registered users are active, and Telecompaper estimates the number of active users at closer to 82 million. 2) The number of free Skype-to-Skype minutes stood at 25.5 billion in the last quarter. Up 72 percent from a year earlier, we can see the annual growth rate has accelerated from 30 percent a year ago. 3) The number of paid SkypeOut minutes reached 3.0 billion. This is also an acceleration in growth, to 57 percent from 33 percent in Q2 2008. 4) Skype recorded revenues of USD 170 million in Q2 (including advertising), up 25 percent year-on-year. Even after adjusting for exchange rate effects, growth remains at a high level of 43 percent, versus 42 percent a year ago. 5) The ‘segment margin’ rose to 23.6 percent in Q2 from 14.1 percent in the year-earlier period. This implies EBITDA of USD 40 million, up from USD 18 million a year ago.
Based on these results, we estimate full-year sales of USD 700 million and EBITDA of USD 180 million, up respectively 27 and 56 percent year-on-year. This puts the sale price at 3.9 times sales and 15.2 times EBITDA. Comparing this to other listed companies, we see that eBay itself currently trades at around 3.0 times sales and 8.6 times EBITDA. Google, which has a lower growth rate than Skype, trades at 7.4 times sales and 11.8 times EBITDA. Based on these comparisons, we can conclude that Skype was sold for a good price. It’s also a much higher valuation than we gave Skype earlier in the year (see our Research Brief 'Skype sale could unlock revenue potential'), when we forecast that growth would decline to levels similar to Google.
Looking at the other side of the coin, the seller also makes a DCF analysis to consider a fair price. Taking an optimistic viewpoint, the seller factors in synergies achieved (which were close to non-existent at eBay). While the seller wants to maximize the proceeds from the sale, other ‘soft’ factors play a role in the deliberations. For example, an IPO of Skype could raise more than selling the company to private equity investors. In this case though, market conditions and sentiment play a big role. While stock markets have recovered sharply since the start of the year, an IPO is always surrounded by uncertainty. The situation is exacerbated by the pending lawsuit. How this develops in 2010 is difficult to predict, but a further improvement in the market conditions is expected. Another element is how urgent is it for eBay to sell Skype? In this case, it seems to be a sellers market. While the synergies with Skype were missing, the company is running fine as a stand-alone business, meaning eBay is not desperate to sell.
In conclusion, we can say that eBay managed to sell a majority stake in Skype at a valuation not far off what it originally paid for the company, capitalizing on the continued strong growth at Skype. While Ebay’s remaining 35 percent stake in Skype is a risk, this can also be seen as an opportunity for further gains, if Skype eventually lists on the stock market on favourable terms.
