PayPal’s $2.2 billion Acquisition of iZettle

 

Overview of the deal

  • Acquirer: PayPal

  • Target: iZettle

  • Estimated value: $2.2 bn

  • Announcement date: 05/18

  • PayPal Advisors: Evercore

  • - iZettle Advisors: J.P. Morgan


Several nights before iZettle was primed and prepped to list on Nasdaq Stockholm Stock Exchange, which would give the company a valuation of $1.1 bn, PayPal, who has been in contact with iZettle for many years, came in with an offer double of that valuation.


PayPal’s offer was all cash and is expected to close in Q3 2018. This acquisition has confirmed that PayPal is looking to expand into an increasing number of markets, predominantly Northern Europe and Mexico. iZettle’s flagship card-reading dongle is the centre of its point-of-sale business which PayPal are looking to exploit to break into the market for offering services to small and medium sized merchants – which make up the majority of iZettle’s point-of-sale service customers.


The move signals consolidation in a market with some competition, with the likes of Square and Stripe. iZettle is added to a list of recent acquisitions by PayPal including Xoom and Braintree’s Venmo business, which aim to augment the current product offerings of PayPal across the globe.

“iZettle and PayPal are a strategic fit, with a shared mission, values and culture -- and complementary product offerings and geographies.” -Dan Schulman PayPal CEO

Company details (PayPal)

PayPal is a pioneer in online money transfers, operating worldwide. The firm primarily operates a payments processor for online vendors, auctions sites and other commercial users.


- Founded in 1998, headquartered in San Jose, California

- CEO: Dan Schulman

- Number of employees: 18,700

- Market Cap: $96.9 bn - EV: $92.8 bn

- LTM Revenue: $13.8 bn - LTM EBITDA: $3.0 bn

- LTM EV/Revenue: 6.7x - LTM EV/EBITDA: 31.1x

Company details (iZettle)

iZettle is a Swedish payments start-up specialising in small businesses. They offer several financial products including point of sales and funding applications but are known primarily for their portable credit card readers.


- Founded in 2010, headquartered in Stockholm, Sweden

- CEO and co-founder: Jacob de Geer

- Number of employees: 230

- Market Cap: N/A - EV: $2.2 bn (Assumed from deal value)

- LTM Revenue: $113 m - LTM EBITDA: -$27 m

- LTM EV/Revenue: 19.5x - LTM EV/EBITDA: -81.5x


Projections and assumptions

  • Short-term consequences

iZettle operates in Northern Europe, Mexico and Brazil (12 countries in total) where PayPal does not have an extensive presence, not to mention that the deal will give PayPal access to an estimated 500,000 businesses who are currently using iZettle.

Further, in 2012 PayPal launched PayPal Here, a payment system for small businesses including a small card-reader that plugs into a smart phone. iZettle offers a similar but more successful business, their flagship point-of-sale card reader. The integration of these systems could provide significant back-end synergies for cost saving on the expensive and comprehensive back-end infrastructure that support these currently independent services. We would expect to see the integration of these services to quickly feed through to reducing iZettle’s operating loss (-$26 m in 2017).


Jacob De Geer, current iZettle CEO, will to head up the company under PayPal, which facilitates minimal disruption which will be integral to this deal not hurting iZettle’s existing strong brand recognition.


The deal is expected to be dilutive to PayPal’s full year 2018 non-GAAP earnings by $0.01 per share. Moreover, iZettle’s revenue in 2018 is expected to be $165 million and total payment volume to be $6 bn. Despite not yet returning a profit, iZettle projects positive EBITDA by 2020.

  • Long-term upsides

In the longer term PayPal must position itself to fight its competitors Stripe and Square, and by expanding its services through iZettle it looks in a better position to do so. Stripe offers a similar service to PayPal's primary product, an online payment service, whereas Square offers an integrated online and point-of-sales payment system.