New Issue: MercadoLibre, Inc. (MELI) $300 Million Senior Convertible Notes Due 2019

- Bill Feingold & Jeffrey Alton, CFA

 

The Convert

Mercadolibre’s new convertible has much, at first glance, to recommend. As essentially the only debt on a $4 billion market cap company, the $300 million deal easily meets Hillside’s guidelines for deal size. The five-year bullet structure, like vanilla ice cream, always works. And the optics are pretty old-school: the midpoints of 2.5% coupon and 35% premium go a long way these days.

The weakness of this deal may also be its strength. Latin America has long been the oddly undiscovered frontier for the convertible market. Perhaps its memories of the peso crisis in the 1990’s. In any event, convertible managers looking for more global exposure should welcome a new issue from an Argentine company. Still, there are obvious risks germane to such a deal, and even in the era of Alibaba an ecommerce platform like Mercadolibre will make those old enough to remember 2000 just a bit nervous.

But if you trust the accounts, Mercadolibre makes decent money. The volatility speaks for itself—the stock, now around 90, traded above 140 last fall. Again, the deal appears to have much to recommend.

The Company

Incorporated in Delaware, MercadoLibre, Inc. (MELI) is the largest online commerce platform in Latin America and operates in 10 countries as the market leader including Argentina, Brazil, Venezuela and Mexico. Ebay became a shareholder in 2001 and the company most recently entered Portugal in 2010. The company operates off one e-commerce platform developed in-house across all countries, but searches by consumers can only be done within a single country. Services include a mix of market and non-market services as follows:

  1. Marketplace – Accounting for just over 60% of revenues and similar to e-bay, the marketplace allows businesses and individuals to offer new or used products at a fixed price or under an auction format. Commission fees are charged as a percent of the sale.
  2. Classified Service – Allows sellers, primarily in the motor, real estate and services industry to list goods and services for a placement fee.
  3. Payment Solution – Available in six countries. Offers a seamless check-out and vendor payment system. 34.2% of the gross value of transactions by value currently use the payment solution.
  4. Advertising – A paid search product within the MercadoLibre platform for sellers. Charge is per click.
  5. On-line store solutions – Third parties can operate on-line stores within MercadoLibre.
  6. Envios Shopping Service – Integrated logistics and shipping services available in Brazil.

MercadoLibre has experienced consistent, high growth since its inception in 1999. In 2013, total revenues were $472.6 million, up 26.5% over 2012 and 173.5% over 2009. Net income was $117.5 million in 2013, up 16% over 2012 and 254% over 2009. Revenues grew 50% in local currencies for the first quarter of 2014. Trailing levered free cash flow was $11.2 million.

MercadoLibre common currently trades at $90.50, down from 105 one year ago and a range between 142 and 80 hit one month ago. Despite consistent growth, the stock has faced headwinds as political and social turmoil rocked Latin American markets and currency controls were put in place in Venezuela. 2013 revenues by country were:

Country         Revenue                            Percent of Total Revenue

Brazil             $206.4 million                               43.7%
Argentina      $122.1 million                                 25.8%
Venezuela     $ 84.6 million                                 17.9%
Mexico          $ 32.8 million                                   6.9%
Other            $ 26.7 million                                    5.6%

MercadoLibre also sports high valuations including enterprise value to trailing revenue of 7.86 and a P/E north of 30. The stock price also suffered most recently as highly valued tech names such as Amazon hit a wall earlier in the year. Still, with Latin America expected to continue its long-term economic growth path, MercadoLibre should continue to grab its share of the market.

Proceeds from the convert are expected to be used for general corporate purposes.