EBay to sell majority of telecom service Skype for $2B to group including CPPIB

SAN FRANCISCO - Rather than enduring the uncertainty of spinning off the Skype telecommunications service through a public stock offering, eBay Inc. has found a different way out: It is selling the majority of Skype for about US$2 billion to a group of private investors, including the Canada Pension Plan Investment Board.

SAN FRANCISCO - Rather than enduring the uncertainty of spinning off the Skype telecommunications service through a public stock offering, eBay Inc. has found a different way out: It is selling the majority of Skype for about US$2 billion to a group of private investors, including the Canada Pension Plan Investment Board.

The deal will help eBay undo its 2005 acquisition of Skype, a deal that puzzled analysts. Despite Skype's strong, steady growth, it was hard to see how eBay, which specializes in running online marketplaces and facilitating Internet payments, needed to own a service that lets people make free or cheap calls on cellphones and computers.

EBay said Tuesday that it will trade a 65 per cent stake in the business to a group of private investment funds for $1.9 billion in cash and $125 million to be paid later. EBay will own the other 35 per cent.

Investors in the group of buyers include web browser pioneer and eBay board member Marc Andreessen and former Skype board members Danny Rimer and Mike Volpi.

Rimer is also an original Skype investor, while Volpi is the former CEO of online video startup Joost, which was started by the same team that created Skype.

The CPP Investment Board is contributing US$300 million to the deal, giving it a 15 per cent overall stake in Skype.

"This is an exciting deal for us," Mark Wiseman, senior vice-president for private investments at CPPIB, told The Canadian Press.

"I think it's important to understand what we're purchasing here," Wiseman said. ". . . This is not your 1999 dot-com deal: You know, no revenues, not earnings, no nothing."

"This is a blue chip Internet company. In fact, one of the leading brands on the Internet and one of the leading Internet communications companies with close to half a billion unique users (and a company) with real revenues and real profits."

Wiseman said the CPPIB saw the deal an opportunity to acquire an interest in a leader in the growing Internet telecom market and doing it through "one of the most strategically valuable Internet brands."

The CPP's stake in the Skype deal reflects a trend in the Canadian pension sector as funds, including the Ontario Teachers and OMERS plans in Ontario, to seek more stable non-stock market investments in infrastructure and other sectors that can generate high returns.

"Whilst this is a private equity investment and it has . . . a higher risk and higher returns than lets say some of the infrastructure deals we've announced recently, it's very, very consistent with our strategy and very consistent with what we've been doing in our private equity space for the past five years," Wiseman said.

The CPP board invests the surpluses generated by premiums paid by employees and employers to the federal Canada Pension Plan, which pays benefits to 17 million Canadians when they retire. The board operates separately and is managed independently, currently overseeing $116.6 billion in assets at the end of June

The board's portfolio is not used to pay pensions today, but in another 11 to 12 years a small portion of the CPP fund's investment income will be needed to help pay retiree benefits.

The deal, which is expected to close in the fourth quarter, halts at least temporarily a plan eBay announced in April to spin off Skype through an initial public offering. Skype's management team, including president Josh Silverman, will stay in place through the change in control, and eBay will retain one seat on Skype's board.

The agreement values Skype at $2.75 billion, eBay said.

This is about $380 million less than the $3.13 billion eBay paid for Skype - which includes the original acquisition price of $2.6 billion, plus $530 million paid in 2007 to several of Skype's investors because the unit met certain targets for profit and growth.

EBay had already acknowledged that Skype was worth much less than it had paid for Skype by taking a $900 million charge to write down Skype's value on its books in 2007. EBay CEO John Donahoe said in an interview that the value eBay got for Skype in Tuesday's deal is "well above what most people expected."

Donahoe said the deal is "a real win-win-win," as it lets eBay's management focus on its marketplace and PayPal businesses, while allowing eBay shareholders to keep a stake in Skype's future success. It also gives Skype an ownership team that "believes passionately" in its future, he said.

EBay shares fell along with the broader market Tuesday, closing at $21.68, down 46 cents, 2.1 per cent.

The deal is the latest chapter in a tale that began four years ago when eBay bought Skype, hoping eBay buyers and sellers would use the service to communicate. Skype was founded by Niklas Zennstrom and Janus Friis, creators of the music downloading service Kazaa, which had riled the recording industry.

EBay's expectations for how its users would adopt Skype didn't take hold. For the San Jose-based web auction pioneer, "Skype has been a distraction," Lazard Capital Markets Colin Sebastian said. "This allows them to focus on turning around the core marketplace."

Although it didn't turn out to be the best fit for eBay, Skype has become increasingly popular overall. It counted more than 480 million users at the end of the second quarter - up 42 per cent from the same time a year earlier. Users shouldn't notice any changes to the service as control shifts hands.

It's also likely profitable. EBay doesn't break out Skype's earnings, but based on Skype's 2008 revenue of $551 million, Gabelli and Co. analyst Robert Haley believes Skype did make money last year. EBay has predicted Skype will see more than $1 billion in revenue by 2011.

Haley said the deal was good for eBay because it lets the company cash out of Skype for more than it could have expected in an IPO - and sooner, since a public offering might not have come until next year. Partially because of uncertainty about the markets, IPO activity has been lower than normal since the financial crisis.

The new majority owners could still decide to pursue an IPO. Donahoe called that "a potential outcome in the medium to longer term."

The group of investors buying the stake includes Andreessen Horowitz, the new $300 million fund set up by Andreessen. Led by the private equity firm Silver Lake, the group also includes Index Ventures and the Canada Pension Plan Investment Board.

Donahoe said the group approached eBay several weeks ago - just as eBay was ready to submit its IPO registration filing to the Securities and Exchange Commission. He would not comment on whether eBay spoke with other potential buyers, but did say that in the negotiations with this group eBay always intended to hold on to a portion of Skype.

"There's never been any doubt in my mind in Skype's potential ... it just didn't fit in eBay's portfolio going forward. This allows us to sort of have our cake and eat it too," he said.

- With files from The Canadian Press

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