In a press release dated September 30, Guofubao Information Technology Co. (or GoPay) announced its acquisition by a US company. A technology and financial service platform, GoPay has a vast customer base in China and parts of Asia. Notably, GoPay’s business revolves around mobile payment and financial services.
GoPay announced that digital payment services provider PayPal would make the acquisition. Reportedly, PayPal would purchase a 70% stake in the Chinese company. The purchase would make PayPal the first overseas company in the Chinese digital payments domain.
However, the value of the GoPay purchase consideration hasn’t been made public. This was an entirely unprecedented move, considering the ongoing trade war between the US and China.
Surprisingly, a few days before GoPay made the announcement public, PayPal had raised a considerable amount through debt financing by the issue of long-term notes. To be clear, there was no formal statement from PayPal that the debt issue pertained to the 70% acquisition of GoPay.
In my opinion, the magnitude and timing of both events present a striking coincidence. Let’s take a look at PayPal’s debt issue.
PayPal’s SEC filing
On September 26, PayPal Holdings had filed an 8-K form with the SEC. Notably, 8-K filings are essential for disseminating any material information about a company. In fact, PayPal’s 8-K filing detailed the issue of four unique series of long-term notes.
In the filing, PayPal informed the SEC about raising $5 billion in debt. The $5 billion debt issue would have four distinct series. The first series of redemption is expected to start in 2022. Finally, the note with the longest term is redeemable after 10 years, in October 2029.
In a company filing dated September 20, PayPal announced the underwriters. Goldman Sachs, J.P. Morgan Securities, and Morgan Stanley were the primary underwriters. Plus, Wells Fargo Bank is the trustee for the issue.
PayPal’s debt notes
PayPal issued and sold four distinct classes of long-term notes totaling $5 billion. The different categories follow:
- 2.200% notes (the “2022 notes”): PayPal sold 2.200% notes for an aggregate value of $1 billion. The notes will mature on September 26, 2022. The record dates for coupon payments will be March 11 and September 11.
- 2.400% notes (the “2024 notes”): The 2024 notes hold an aggregate value of $1.25 billion. The notes will be payable on October 1, 2024. The record dates for the notes are March 15 and September 15.
- 2.650% notes ( the “2026 notes”): The third series, raising $1.25 billion, would become due on October 1, 2026. Registered bondholders on March 15 and September 15 would receive the interest payments.
- 2.850% notes ( the “2029 notes”): The final series of notes would be redeemable on October 1, 2029. The 10-year debt note’s aggregated value totals $1.5 billion. The record dates for the 2029 series would be the same as the 2024 notes and 2026 notes series.
Moreover, PayPal plans to make the coupon payments for each of the series biannually. Interest on the 2022 notes series would be payable on March 26 and September 26. For the rest, the coupons would be payable on the first day of March and the first day of October.
Notably, PayPal filed annexures along with its 8-K report. Specifically, each debt note issue would be supported by a distinct annexure: Annex A for the 2022 notes, Annex B for the 2024 notes, Annex C for the 2026 notes, and Annex D for the 2029 notes.
Acquisition financing: Amazon and Whole Foods
At times, companies use acquisition financing as a means for expansion. They issue securities, either equity or debt funds, to raise capital for a corporate reorganization. When a listed company issues debt funds for a merger or acquisition, the covenants safeguard the investors’ interests.
Tech companies regularly raise funds from the open market by issuing debt funds. For example, Amazon (AMZN) declared in 2017 that it would acquire Whole Foods Market. Amazon fixed the purchase consideration at $13.2 billion.
Amazon issued $16 billion in long-term notes. The company identified seven separate series of debt notes with varying maturity periods. The minimum maturity period was three years, and the longest among the series was redeemable after 40 years.
Amazon’s covenants explicitly claim to finance the purchase of Whole Foods Market. However, no such information is mentioned in PayPal’s covenants. In addition, PayPal’s debt covenants clearly state that the notes “shall not be convertible into or exchangeable for any other security.”
Hopefully, we can look forward to PayPal’s earnings release in the third or fourth week of the month. PayPal’s new debt issue is bound to increase cash flow from financing activities. There is still uncertainty about what the cash flow from investing activities will reflect. We’ll see whether it might include the exact value of the GoPay acquisition.
To reiterate, PayPal has not made any comments about the debt issue and the GoPay acquisition. The detailed filing of the PayPal 8-K is available on the SEC website.