Financial payments company PayPal has agreed to invest $750m in MercadoLibre as part of a $1.85bn equity offering for the Argentina-based online retailer and payments provider.
PayPal will make its investment through the purchase of common stock in Nasdaq-listed MercadoLibre and while such private investments in public equities (Pipes) are rarely a focus for Global Corporate Venturing the backstory to this deal is fascinating.
MercadoLibre will also publicly offer about $1bn of common stock and sell an additional $100m from an affiliate of hedge fund manager Dragoneer Investment Group.
The PayPal and Dragoneer investments are contingent upon the closing of the public offering, and underwriters will have the option to purchase an additional $150m in MercadoLibre stock depending on demand.
PayPal has been ramping up its spending after last year committing to pump $3bn a year into deals. In the past few months, PayPal’s minority investments have included cross-border savings platform Raisin’s $114m series D round, money group Dosh’s $40m B round, Viva Republica’s $80m deal, LendUp’s funding and spin-off of its credit card business and mobile bank operator Monese’s $60m round.
Dan Schulman, CEO of PayPal, said: “We’ve been impressed with the digital commerce and payments ecosystem Marcos [Galperin, CEO of MercadoLibre,] and his team have built. We see great opportunities to integrate our respective capabilities to create unique and valuable payment experiences for our combined 500 million customers throughout the region and around the world.”
Some of the funding could also flow into corporate venturing for MercadoLibre, which has looked to China rather than the US as its closest peer for learning about corporate venturing and its strategic direction, according to insights shared at the Corporate Venture in Brasil 2017 conference.
PayPal’s type of Pipe deal into MercadoLibre is increasingly common, lead by China-based groups such as Tencent, which has a strategy of minority and majority stake investments as part of an ecosystem development and partnerships strategy.
MercadoLibre’s own corporate venture capital strategy was born in 2013 after its parent opened up its e-commerce platform the year before. MercadoLibre had by late 2017 now made about 20 investments, of which about half were in its home country of Argentina and about five in Brazil.
MercadoLibre said the funding would expand its platform, strengthen its logistics infrastructure and invest in inclusive end-to-end financial technology and payments tools.
For the fourth quarter, MercadoLibre said its payments business, MercadoPago, was the fastest-growing segment of the company’s business. The number of payment transactions grew to 126 million, up 72% year-on-year, resulting in record total payment volume (the total dollar amount of transactions) of $5.3bn, up 23% compared to the prior year quarter.
MercadoPago is seeing increased adoption at brick-and-mortar retailers and online stores, with transactions exceeding $2 billion for the quarter. MercadoLibre expects off-platform transactions to exceed those from its e-commerce operations in the very near future. The total number of payment transactions has grown in excess of 60% year over year for 16 successive quarters, ie for four years.
Founded in 1999, MercadoLibre is Latin America’s leading ecommerce firm and had a collaboration and competition going US-based peer EBay back to 2001. After a period when the pair competed for the same Latin American e-commerce customers, EBay gave MercadoLibre its Brazilian online trading platform iBazar in exchange for a 19.5% stake in MercadoLibre. In addition, the companies agreed not to compete in the region and to share best practices.
One of the developments that resulted from the partnership was the creation of MercadoLibre’s payment solution, MercadoPago, which was modeled after PayPal. EBay had acquired PayPal in 2002 for $1.5bn and spun off the payments group in 2015.
EBay made $1.37bn from its sale of 18% of MercadoLibre in October 2016 having spent about $146m to acquire its stake in MercadoLibre, according to analysis by Motley Fool published on Nasdaq on 16 March.
At the time of the divestiture, eBay sold its stake of MercadoLibre for about $168 per share. At the close of trading on Tuesday, 12 March, those shares were fetching about $483 each, Motley Fool added. In the intervening period, Latin American retail e-commerce sales have grown from $29.8bn in 2015 to $54bn in 2018.
The decision to spin off PayPal and then MercadoLibre has resulted in fantastic financial gains for EBay but the cultural and now equity connections between the two former partners has created the opportunities to build closer links in one of the most exciting regions in the world.
SoftBank (SBG), a Japan-based internet and communications conglomerate, this month committed $2bn to launch a $5bn fund to invest in Latin American startups. Masayoshi Son, chairman and CEO of SBG, said: “Latin America is on the cusp of becoming one of the most important economic regions in the world, and we anticipate significant growth in the decades ahead.”
As SBG noted, the Latin American market represents 10% of the world’s population and 8% of the world’s gross domestic product (GDP) but has more than 375 million internet and 250 million smartphone users, which outpaces the US.