EBay Bullish Bets Surge on Carl Icahn’s Activism: Options

Options investors are the most bullish on EBay Inc. in almost eight years amid optimism that Carl Icahn’s activism will help reinvigorate the company after holiday sales missed forecasts.

Puts protecting against a 10 percent drop in EBay stock cost 1.25 points more than calls betting on a 10 percent rally. The price relationship known as skew fell to 0.71 points on Jan. 24, the lowest level since May 2006, according to three-month data compiled by Bloomberg. Shares of the world’s largest online marketplace gained 7.6 percent last year, lagging behind the 30 percent rise in the Standard & Poor’s 500 Index.

EBay has slumped 3.7 percent since the company announced Jan. 22 that Icahn, who has built up a 0.82 percent stake, proposed splitting off its PayPal online payments unit and is nominating two of his employees to join the board. The company has worked to streamline its marketplace and beef up PayPal, even as Amazon.com Inc. and others compete hard in the e-commerce area. Analysts estimate EBay’s earnings growth will slow for the fourth straight year in 2014.

“The stock has underperformed and arguably the most respected investor on the planet is now expressing an interest and engaging the company,” Scott Kessler, a New York-based analyst at S&P Capital IQ who recommends holding the stock, said in a Jan. 30 phone interview. “What people are wondering is if Icahn’s interest and potential activity can help unlock value that might not be as evident or as available in light of fundamental challenges.”

Growth Engine

EBay, which allows vendors to sell everything from motorcycles to golf clubs via auctions and at fixed prices, acquired PayPal in 2002 to add online-payment services. The unit has been a growth engine for EBay, almost tripling sales in the five years ended in 2012. It now accounts for about 40 percent of revenue at San Jose, California-based EBay.

Icahn said in a Bloomberg Television interview Jan. 22 that EBay “hasn’t done as well as it should have” and called a separation of PayPal from the company a “no-brainer” that would improve value.

EBay Chief Executive Officer John Donahoe said the company should stay together, citing how a unified entity helps fund PayPal’s expansion into areas such as mobile.

Bullish Options

Implied volatility, used to gauge the cost of options, for three-month contracts with an exercise price 10 percent below EBay’s shares was 26.97 Jan. 31, while the measure for calls 10 percent above the shares was 25.72. Skew, or the difference between put and call volatility, is 63 percent below its one-year average of 3.33 points.

Eight of the 10 most-owned EBay options are bullish. July $62.50 calls, with an exercise price 17 percent above EBay’s closing price Jan. 31, had the largest open interest, followed by $65 calls expiring in July and $60 calls expiring in March.

Amanda Miller, a spokeswoman for EBay, declined to comment on the company’s options trading.

“Icahn is one of the best investors on the planet,” Vijai P Mohan, a fund manager at San Francisco-based Hyphen Fund Management LLC, which manages EBay shares, said in a Jan. 30 phone interview. “He sees value in this company and I do too. He probably realizes that the whole situation is undervalued and the way to cause a rapid short-term rise in the share price is to mention PayPal.”

Holiday Sales

On the same day EBay disclosed Icahn’s proposal, the company reported fourth-quarter revenue of $4.53 billion, below the $4.55 billion average analyst estimate compiled by Bloomberg for the crucial holiday-shopping period. For 2015, the company lowered its forecast range to $20.5 billion to $21.5 billion from $21.5 billion to $23.5 billion.

Profits this year are expected to grow 9.4 percent to $2.96 a share, according to estimates compiled by Bloomberg. That trails the 15 percent increase in 2013 and 16 percent pace a year earlier. EBay trades at 18 times estimated earnings, while Amazon.com’s valuation multiple is 90. Companies in the S&P 500 are trading at 15 times projected profits.

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, jumped 16 percent to 21.44, the highest level since December 2012, at 4:15 p.m. in New York. Its European counterpart, the VStoxx Index, gained 10 percent to 24.02.

Resisting Separation

Some shareholders are so far backing Donahoe’s stance in resisting a separation of PayPal. Investor Condor Asset Management Inc., for one, said the stock will rise as EBay expands PayPal to more vendors. Sharing risk management and transaction data helps the $69 billion company’s online marketplace and payment units better compete against Amazon and startup Square Inc., said Susquehanna International Group LLP.

EBay’s ownership of PayPal will boost long-term growth because the digital payment service enhances EBay’s efforts to help retailers connect with customers, according to Ron Josey, an analyst at JMP Securities Inc. in New York.

“There are a lot of synergies between EBay and PayPal,” Josey, who rates EBay shares market outperform, said in a Jan. 30 phone interview. “If the goal for EBay to partner with retailers is to help them transact and drive sales, it makes sense for PayPal to stay in its portfolio.”

PayPal introduced technology in September that allows consumers to enter a store and pay without touching a credit card or smartphone, as retailers use a device that detects phones that have the PayPal application. EBay also acquired in 2011 GSI Commerce Inc., a company that hosts retailers’ websites and offers marketing services to customers.

Independent Service

While there are some advantages to keeping EBay and PayPal together, the manager of shareholder Jacob Internet Fund said Icahn’s case for splitting up is stronger. Retailers that may be hesitant to use PayPal because it’s owned by their competitor could choose to adopt the service if PayPal were independent, Ryan Jacob said in a phone interview.

Analysts and investors estimate EBay’s breakup value is about $69 a share, 30 percent more than EBay’s closing price Jan. 31.

“Given the Icahn position, there is a clear and logical trend,” Alec Levine, an equity derivatives strategist at Newedge Group SA in New York, said in a Jan. 27 interview. “When activists get involved, skew flattens or inverts because the perception is, in at least the short-term, that the downside is limited. If the stock falls, the activists will build a larger position, effectively putting a floor on the stock.”

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