We're going to take a look at the offer for PayPal by a consortium of Stripe and a private equity firm.

So what I'm going to do is, let me just go to my slides quickly, and then I can start with that.

Is I'm going to give you just an overview of the deal, but the aim of this session is that we want to really try and understand is, number one, how they could afford to pay for that deal, number one. And then number two, if there's some more juice in the tank that they could potentially pay more for the transaction.

So as I mentioned, Stripe is a payment processor, and that's grown really substantially. It was founded in Sweden.

And they've teamed up with Advent, which is a major private equity firm, and they made a bid to take PayPal private.

Now, they didn't go through the official filings to do that, but they did do it through the media.

And the offer price that they gave was $60.50 per share on an all-cash deal. So one of the really key things here is how you're going to finance $60.5 billion of cash. That's a really big ticket.

So that is an equity value. That gives an equity value for PayPal of about $53 billion.

Okay? So that's how much you've got to finance. Sorry, I misspoke.

60.5 is the share price, $53 billion is the actual ticket that you've got to finance, and that's an enormous amount of money. Now, the premium when the offer was leaked was 27.7% over the unaffected share price, and the unaffected share price was about 47, just over $47. So they're offering $60. Now, that sounds like a pretty reasonable premium because most M&A premiums would be in the region of about 20% to 40%.

At the lower end, where there's 20%, it usually means a couple of things. Probably there's low competitive tension.

There's not many other bidders or likely to be other bidders.

But also, it often, hugely in the public markets, depends on what has happened to the share price in the prior 20... 12 months. And in the case of PayPal, the share price, literally over the last five years, it's been a really terrible story, and it's been falling.

And this offer of $60.5 is actually not very great when you look at it in the context of certainly the last five years, and even in the 12-month high.

So the PayPal's answer, and when we say PayPal's answer, it's the board of directors of PayPal, basically said, "This is inadequate. We're not even going to look at this. We're not going to engage with you.

We're not going to talk, so there's no process that is starting." So what we're going to do is take a look at, number one, how they're going to finance $53 billion, number one.

And number two, whether there's more juice in the tank.

So started on July 14th, PayPal closed at $37, and then on the next morning, Reuters breaks the $60.5 approach, and the share price jumps 17%.

PayPal actually was already working with Goldman Sachs and Evercore on a sale or breakup. They'd actually had a presentation in the spring of this year where they had been going on and saying, "Look, we know things are bad." They had fired their old CEO, a new CEO come in, and they said, "Look, we're going to be able to extract over the next few years about a billion and a half of synergies, and we're going to do a share repurchase." Okay? So that's the background to this, and they're already looking at strategic alternatives. But the board on July 16th said, "No, it's not good enough." And not only is it not good enough in value, and I think they've got a reasonable case for that given what's happened to PayPal's share price over time, but there's also some regulatory issues here.

Because certainly if Stripe and PayPal combined, they will get certainly over 30% market share, and usually that's kind of rough rule of thumb threshold that you would get an antitrust or competition challenge for this transaction. And there's three components of PayPal, which I'll go into in a moment and I can explain that in a bit more detail. And there's also financial risk.

Now, they do-- The press did say that they had a $50 billion committed debt financing.

So assuming that's true, then there's some lenders out there who think that they can actually finance $50 billion. I would expect that that $50 billion debt ticket is going to be based on not just PayPal standalone, but it'll be based on PayPal plus Stripe.

So the Q2 results in July 28th were actually pretty positive.

The guidance was improved. That's the equity research analysts kind of improving their expectations. And they were-- The management saying that the turnaround plan is kind of reaffirmed. So the shares are currently trading at $60.59. So this means the market says, "Look, we think there's probably more juice in the tank than the $60.5 in there." So let's take a look in a bit more detail.

So firstly, PayPal. There are three components of the business. There is the main cash generation, which is the checkout, and that's when you go on a website and you click PayPal, and you check out.

That's 28% of their transaction volume, and that's just growing at 2%, but it is the bulk of the kind of profit generation. And it's actually been growing at 2% at the moment, but it has been in decline historically.

So this is kind of a threat. Then the second Segment is the Venmo consumer finance.

If you live in the United States, you will use Venmo.

It's like being able to send your friends or some corporations or shops a payment.

And that is growing. That's 90% of value, and that's growing much faster at 14%. And then Braintree is like a kind of a wholesale payment system, really thin margins, but again, that's growing much faster than the checkout process.

So you can see here that Stripe is looking at this business, and they're probably interested in the checkout business because that's got a huge number of users.

It's 479 million users. So for someone like Stripe, that is a really interesting proposition.

Their margins, PayPal's margins, are significantly lower than the industry, but they are very cash generative.

The free cash flow is over $6 billion, which kind of matches the EBITDA amount, and their revenue is about 34 billion.

And they're expected, as I mentioned to you, within this process of doing a restructure, that they will buy back about $6 billion of shares in the future, assuming that no transaction actually happens. So this, in terms of a classic leveraged buyout candidate, looks pretty interesting.

Very cash generative, slow growing, but often slow growing companies can actually be really good classic leveraged buyout targets. So this is what we're going to take a look at and how can we finance this transaction? So the buyers. Now you would have thought, though, Stripe's valuation comes in at $159 billion.

Now, Stripe is a private company, and they processed about 1.9 trillion of payments in 2025. And they're growing fast. The volume growth was about 34%, but they're not listed, they're private. So it's much harder for them just to simply write a check because the funding would have to come from debt, and the equity funding would have to come from the private side of funding. So they wouldn't be able to do a secondary issue in the markets. So they will want the PayPal's consumer wallet and the 439 million accounts that are using PayPal. And the problem is the Braintree overlap. So that Braintree is that kind of wholesale payment system.

That is where probably the main competition law issue sits. So what I've done is I've looked at this in two ways.

One is that Stripe and Advent just buy the whole business, and they can merge into one, and then they will sell, do an IPO maybe in four years' time, and Advent will sell at that point.

The second option I've taken a look at is where we have Advent and Stripe buying the business, but then as soon as the transaction's finished, then it's split up. Advent will take everything apart from the kind of core shopping link, that kind of button that you click, which is PayPal.

They'll take Braintree, and they'll also take Venmo, and then they will do their own deal with that, turn it around, and then sell it at a later date. One of their issues, though, is that their latest flagship fund that they've raised is only 25 billion.

So there's a limit to how much funding they can actually give this deal, because you wouldn't expect more than about 15% of that fund to be put into this transaction. Maybe more, but generally, you wouldn't expect that to be an issue. So I've looked at this in two ways, like one big merger and putting everything together and doing IPO.

And then secondly, Advent splitting PayPal out, Stripe taking the main payments processing, and then Advent taking Braintree and Venmo. So let's take a look at the kind of valuation here in a bit more detail. So you can see here this is the share price since June 1st, and this is a substantial premium to that, 30% premium.

Normally, under normal circumstances, if PayPal share price had kind of been a gradual upward trajectory, and it has not done, despite the markets being at record highs, then that would be a really good premium. But it's clear that the market wants more despite this heavy premium because the share price over time has been so terrible.

So it kind of looks as though you're getting this really cheaply. So before, the enterprise value before the offer was about 44 billion. With the offer, the enterprise value is about 55 billion.

But if you look at the multiples, so enterprise value to EBITDA, it was trading about 6.8 times. And that's really low for any kind of business, even at these kind of really low growth rates. With the premium, that pushes it up to 8.6, and that is definitely in the kind of leveraged buyout territory of whether an acquisition multiple would sit.

But PayPal is saying that this is an undervalued business because if you look at it over the five-year period, you'll see in the next slide how substantial that is. The other interesting thing in here is that the equity research community is a bit divided because price targets have a range of between $36 and $70, about a $55 average, which is actually below the offer price.

So even those kind of super expert equity research analysts have really kind of divergent views about PayPal.

And actually, to be fair, Stripe, who is in the same business, and Advent, who've done a lot of deals in this sector, should be actually pretty good at analyzing the true valuation of the business.

So if we go to the five years, and this is why PayPal has said, "No, not a deal," because you can see in the context of where the stock was trading in 2021, admittedly, that was like a million years ago, it's a really dramatic low. So over the last five years, PayPal has lost 78% of its value. Now admittedly, most of the sector has been downgraded, but PayPal sits at the bottom of this table.

So this is why the directors are saying, "Look, this is BS. We're not going to sell to you because our stock price is so low. We've got a turnaround plan.

We're going to buy back the stock. It's all going to be good.

And if you really want to buy us, you're going to have to offer a lot more money." So what can they actually pay for it? So Advent wouldn't be able to do this deal on their own, okay? Even though it looks pretty cheap. Because if you look at their fund, the new fund that they've raised, about $25, $26 billion, if they wrote a check of 21.9 billion, then that would be 84% of the fund. It's just not going to happen.

So even a 34% of that fund, an 8.8 billion ticket, will probably need co-investors for them to be able to finance that.

And it's not just the fact that they've got to buy the equity at 53 billion, they've got to repay PayPal's debt because there'll be change of control clauses, and there'll be a big chunk of fees to pay the advisors.

And that 1.4 billion, most of that will be the debt financing, the underwriting fees going to the debt providers.

A little bit of that will be the advisory accountants and lawyers, et cetera.

But they have disclosed in the press, they've said that they would be able to raise about $50 billion of debt in the deal. That's not clear whether that is just PayPal or a combination. I suspect very strongly that that 50 billion is based on a combination of PayPal and Stripe, not just one on their own. So I've looked at two businesses. They've just merged the two businesses, so Stripe and PayPal come together. Advent provides quite a bit of the funding, because there's more cash than just the debt that's needed, about 7 billion.

And then five years later, they will IPO the business, and that's when Advent will exit.

The second route is where they buy the business, and as soon as the ink is dried, then they work on splitting it out, and Stripe takes the main payment and then Advent takes Venmo and Braintree for around about 5 billion that I've estimated, and that will also remove that antitrust issue as well.

So, they call it private equity buyout, but actually, it could either be like a merger fundamentally or a kind of carve out or break-up.

So we looked at the two routes here, and I've got some models which I'm going to jump into in a moment.

So the two main ways, in option one, is buying the whole, kind of merging the business together. Now, if Advent just made an investment of 7.1 billion in the combined business, they would get about 5% of the overall group, even with that $50 billion of debt raised.

The problem with that, if they just bought regular equity in the combined group, their returns would be about 10% over a five-year period, and that's just not good enough for the private equity.

So in most situations in these transactions, Advent wouldn't just buy 7.1 billion of common stock. What they would do is they would structure their transaction in two equity tranches.

One of which is a preferred equity, probably at a pretty high coupon, and I've assumed 11%. I think I've estimated the debt is about 8.5%. So a big chunk of that equity is going to go in as a preferred share, which gets a fixed coupon of 11%, and that means that kind of locks in a lot of your return.

The remainder amount, the remainder kind of sweet equity, will get a much, much higher return, and that means the blended return from the preferred equity tranche and that sweet equity is going to give them, I estimate, an IRR of around 30% based on the current price, okay? Based on the current price, which is a money multiple of about nearly three times over four years, which is why I think potentially, even in option one, there is more gas in the tank for them to pay a higher price on the basis that they merge the whole thing together.

The second option is where they buy the business together, but then as soon as that ink's dried, Advent will just buy Venmo and Braintree, or kind of carve out Venmo and Braintree, and I'm assuming they're going to pay about 5 billion for that. They'll raise another two and a half billion.

It's not a very cash generative business, so the debt capacity is fairly limited in that business. But I expect if they did that, they'd get a really, really juicy return of nearly 50%. So I definitely think there's a little bit more juice in this deal.

So, and they've got two options, full merger and then IPO or a carve out. So let's take a look at some of the models. So I'm just going to go over to my model so you can take a look at this. And you can see here I've got a number of assumptions here, and I'm not going to go through all the assumptions because they're very, very detailed. If you want these files, make sure that you email us, and I will give you an email address at the end of this session.

Okay.

I want to make sure that's set up.

So I've got the transaction price here.

We've got the diluted share count, and then I've got the purchase price, about 53 billion, and I've got some information about PayPal here And then I'm assumed that the margins are going to improve.

And what I've assumed here is that the margins of PayPal are going to improve more than the scheme that they've already announced, that restructuring scheme.

Because the restructuring scheme estimate there's going to be about another billion and a half of profitability by just kind of restructuring the business. But I've assumed that Stripe and Advent will actually take the PayPal business and push its margins up to the industry average. And I've estimated you could probably extract another $2.6 billion of synergies by doing that, and I'm assuming it'll take about four years to do. I've had to, because Stripe is a private business, what I've had to do is estimate their financials, and I've done that by taking their disclosed payment volume and then estimated how much revenue they get from that, and then estimated a margin based on the industry average. And that means I've got a revenue and an EBITDA number, because when I've analyzed it, I've had to combine Stripe and PayPal together. So in the option one where Advent buys a combined business, it's a $50 billion debt ticket. I've assumed about 8.5% cost of debt. That's a blended cost of debt.

I'm going to assume that the cash tax rate's about 20%, and then the exit multiple on the PayPal business, I'm assumed nine times, and the exit multiple on the Stripe business 25 times. So I've assumed, because they're quite different businesses, that they will sell them on different multiples at exit. And so the real bump in this combined entity is this juice or the extra $2.6 billion of profits that they will extract by basically improving the PayPal business. Now, the second option, what I've done is made some assumptions. Or option two is where the private equity firm, Stripe takes PayPal's core business and Advent takes the rest.

So I've had to make some assumptions here.

I've allocated some costs to the Venmo business and Braintree.

I've then had to estimate some multiples for Venmo and Braintree, and I've had a bit of a margin discount there as well.

And I've had to estimate some growth rates.

And then I've also assumed that the private equity firm, in this case, Advent, would expect a 20% IRR.

And then I've made some assumptions that the preferred stock will get 11% return. So on a combined business, you can see here this is adding it all together, and we can see that we've got this margin uplift over four years where the margin improvements come about. You can see that they go a long way of paying the debt. The debt by the end of year one is about $46 billion, and that falls to about $25 billion. So you get a little bit of boost from that in your returns. But most of the boost is going to come from the multiple of these profits. And the equity value at exit on a combined business, remember, is about just shy of $200 billion, and that gives a combined IRR of 10%.

Now, for a private equity firm, that's just not interesting, right? So I've then assumed that if Advent structured their equity with a preference share tranche and a common equity tranche, then the IRR is approaching 30%. Now, probably, if they presented this to the Stripe board, Stripe board would push back and say, "Look, this common equity strip of 5%, we're not going to give you 5% and let you get a 30% return." They would negotiate that downwards, probably. So that could be negotiable downwards down to about 20%.

So, as you can see here, that I've done a little sensitivity table.

But let me quickly go to, because I'm just conscious of time, the option two, the breakup. So here I've got a whole load of assumptions, which I've already showed you previously, but I've split the PayPal business into three segments. I've got the core business, Stripe, which is Stripe's core business, which is the PayPal checkout and Stripe's taking that on. And that's most of the EBITDA. So that's a big chunk of the EBITDA. And Stripe wants that because of those over 400 million users.

Venmo and Braintree, these two, this is what I'm assumed that Advent's taking. So that's getting on for about $700 million of-- Sorry. $600 million of EBITDA.

And I'm assuming that there's different multiples for these businesses because they're growing at different rates and they've got different competitive advantages. So I've assumed nine times for the PayPal core business, 20 times for the Venmo business, and then six times for Braintree.

Now, I've assumed on a sum of the parts value based on this, that actually that is more valuable than the cost of buying the whole company. So you get this kind of uplift.

The three parts is actually worth more than the whole. And this is probably something that Evercore and Goldman will be looking at, should PayPal actually jettison some of these other businesses and get more value for them. And it's quite extraordinary because PayPal is a famous company. This is the PayPal that Peter Thiel and Elon Musk helped found back in the late '90s.

And so it's kind of extraordinary.

And they sold it, I think, for about $1.5 billion back then, and now it's generating like over $6 billion of EBITDA. So they kind of sold out a much too and lower value. Now, for Advent's carve-out, what I've assumed that entry EBITDA, which is the sum of these two EBITDA's here, I've assumed an entry multiple of 12 times, which kind of blend of these two multiples here. I've assumed they've taken on some debt, not that much because remember these businesses are a lot less cash generative, and they put in a big chunk of equity.

But there's going to be a margin uplift by the efficiencies So over this four-year plan, and the sell after four years, and this four-year plan is just the Advent piece of it here. And I've assumed that they'll get an IRR of 49%, and that's making some big assumptions, and I would expect that there's some more juice in the tank or certainly the ability of Stripe to negotiate that equity tranche that they're putting in to be lower.

Now, let's take a look at the ability for them to pay more for the business. Okay? So I've made some assumptions here. If I come up to the top, I've assumed a four-year hold period.

We've got to refinance the debt. I've got a target IRR of 20%, and we've got an Advent fund size of about $26 billion. So here, what I've got is just a little sensitivity here. If Advent takes just pure plain shares, the deal doesn't work because they get a 10% IRR.

But if Advent gets a 20% on preferred, and that Stripe absorbs all the rest of the equity, which is really unrealistic, then they would actually be able to pay $69 a share, but I don't think that's terribly realistic.

But if Advent gets 20%, Stripe still keeps 8%, there's still a bit more juice than the $63.

But if you do look at the breakup option, okay, so in this case, if there is a breakup, then the maximum price that they could pay just for the Venmo and Braintree divisions, I estimate to be about $14 billion. Because remember, they were getting that really high IRR in the breakup. So they were getting nearly 50%.

So if they got a 20% IRR, in other words, they paid more for those businesses, what that means is that the overall offer can be more. And I estimate that actually, assuming that the core business of PayPal stays the same, because they are going to be paying a lot more for these businesses, given their higher IRR, that actually the overall offer on a breakup scenario could be about $74 per share. Okay? Now, the problem with that is that this deal structure would be about 45% of Advent's new fund. So that's unlikely to be able to be done unless they have lined up a consortium, which I'm sure they would've thought about doing that.

So I would expect if they really want to pay more, rather than just doing a merger of Stripe and PayPal together, instead, they do the deal together, that is Stripe and Advent, and then as soon as the ink is dried, then Advent takes these two businesses, which reduces the antitrust issue, number one, and number two, will give them a really juicy return, and actually this means that they can pay more. So if I was PayPal's management, I would say, "Yeah, there's more on the table here," and I would expect them to get towards at least $70 a share. Now, that may be a big number, but I think that's not unreasonable for PayPal's management to review this. And undoubtedly, PayPal's advisors will have done this math, and they would've been saying to them, "Hey, look, this is undervaluing your business, not only because the share price has come down," and that's just a market perception issue, but also fundamentally, we think that they're getting these businesses, particularly these smaller, fast-growing businesses, probably way too cheaply.

Because okay, you've got a slow growing behemoth growing at 2%, but you've got these other Venmo and the Braintree businesses, which they're picking up really cheaply, and that's probably where the extra value lies in being able to push up the share price.

Let's just go back to my slides. So, based on the maximum price under each constraint, you can see here that the break up option is absolutely far and away the best way of getting a higher price. So this means if you were PayPal's management, the two options that I would have is number one, is I'd say, "Okay, if you want to buy us, you're going to have to pay over $70 a share." Number two, if they're not prepared to do that, I would sit down with Evercore and say, "Hey, look, we need to sell these two businesses, Braintree and Venmo, and realize a much greater value for those businesses and stick to our core business and really improve the margins in that business so we get re-rated." So that would be my strategy for the management team of PayPal, is to take a look at these two things.

Number one, to make sure that they pay a high price, over $70.

Number two, actually do the breakup yourself and get a realizing boost to your valuation from that breakup, number one, and then number two, to turn around the business and then do a share buyback. So that would be a shareholder value creation opportunity. So from here, the share's already trading over 60 and a half dollars. The market is expecting more.

So I expect that if they're really serious about this, they're going to have to pay more, and it probably should be over 70 bucks.

And if they don't pay more than that, I would seriously expect that PayPal looks at breaking up its business and then really focuses on just turning around their business too. So that's a summary of the deal.

I hope that's been useful and helpful.

What I'm going to do is I'm going to give you an email address that you can use if you want to get the file. So I'm just going to go info@fe.training.

And in the subject line, if you can just put LinkedIn.

Okay? And that's easier for us. So if you want these files, that will include the PowerPoints and the Excels, then just email info@fe.training and just put in the subject line LinkedIn, and we will send you that by return.

I hope you had a great Friday, and I hope you have a wonderful weekend, and I hope this has been useful and give you some kind of food for thought about the transaction.

And we'll see whether Stripe and Advent can pony up some more cash, or whether PayPal goes, "Okay, we're going to restructure business." Because I don't think it's sustainable for them just to sit where they are right now.

But thank you so much. I hope you have a great weekend.