Is the Paypal-iZettle Merger in Trouble?

PYPL - Is the Paypal-iZettle Merger in Trouble?

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Paypal Holdings Inc (NASDAQ:PYPL) stock is up 13.6% since it presented its third quarter results on Oct. 18, beating both revenue and earnings projections, with revenue up 14% year over year, to $3.6 billion. PYPL opened the next day at $83.25, up 8%.

Several months ago, Paypal went on a buying spree, acquiring four companies in the course of a month. Paypal’s biggest acquisition was a $2.2 billion deal to buy iZettle, a company referred to as the European version of Square Inc (NYSE:SQ).

Like Square, iZettle provides small businesses with point-of-sale equipment for accepting payments, along with analytics and financial services, such as loans. According to a Paypal investor presentation, iZettle will process $6 billion worth of transactions this year, bringing in $165 million in revenue.

Based in Stockholm, iZettle serves 500,000 merchants across European countries such as Britain, France, Germany, Italy and Spain, along with Mexico and Brazil.

Buying iZettle would strengthen Paypal’s presence in Europe and Latin America. It would also, according to InvestorPlace contributor James Brumley, make it more difficult for Square to advance in these markets.  

In his view, the iZettle deal would boost Paypal’s stock price.

On Sept. 20, Paypal announced that it had closed the deal. However, that same day, the British Competition and Markets Authority (CMA) announced it would investigate whether the merger would lead to “substantial lessening of competition.”

On Nov. 26, the CMA announced that it had finished its Phase 1 investigation. Paypal could be forced to abandon the deal, or divest iZettle’s UK business.

How will this impact Paypal’s global expansion and Paypal stock?

Problems for the PayPal-iZettle Deal

Paypal and iZettle both have a strong position in Britain. According to the CMA, the merger would combine “the 2 largest suppliers of mobile point-of-sale devices in the UK.” The CMA thinks this could result in consumers “paying higher prices or receiving a lower-quality service.”

The investigation is now moving on to Phase 2. How likely is it that these regulators will stop Paypal from buying iZettle?

According to the CMA, there were 37 Phase 2 investigations over the past five years. Of these, 17 deals were cleared, 3 were blocked and 6 were cancelled. The rest were cleared after offering “remedies,” such as agreeing to sell part of the business.

Historically speaking, this gives Paypal a 46% chance of getting the deal cleared without needing to make concessions. Paypal may also agree to divest iZettle in the UK in order to advance in other markets, or it may choose to abandon the deal.  

Impact on PYPL Stock

If the deal runs into trouble, it would slow, but not stop, Paypal’s global expansion, with a minor impact on Paypal stock. Paypal could acquire other companies or expand on its own. International revenue accounted for 45% of Paypal’s sales in the past 12 months and this could increase as Paypal enters fast-growing markets.

As I mentioned in July, Paypal’s mission is “democratizing financial services.” According to the World Bank, 1.7 billion adults lack access to bank accounts. However, two-thirds of them have cell phones, enabling them to use Paypal’s apps.

Paypal entered India last year. In June, Paypal invested in Pine Labs, an Indian payment company with an annualized transaction volume of $15 billion. Paypal began marketing in India this summer and launched its PayPal for Business app in October.

In Southeast Asia, Paypal is investing in fintech startups.

Paypal may also invest in Grab, one of Southeast Asia’s biggest ride-hailing apps. Grab is more than just a ride-hailing app, though — it also plays a role in payments and fintech in the region.

Paypal’s growth in these markets should boost PYPL stock.

Paypal boasts 254 million active accounts and $547 billion in annual transaction volume. Buy PayPal stock if you believe in fintech and digital payments.

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.

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