eBay Takes a $432M Hit on MercadoLibre, But Can Afford It

In 2001, eBay bought a 19.5 percent stake in the Latin American online auction-site operator MercadoLibre. The global slowdown and current turmoil in the credit markets, however, has eroded the value of that holding, as detailed in eBay's third-quarter 2008 10-Q regulatory filing:

We incurred a reduction in unrealized gains of $115.0 million and $432.4 million for the three and nine months ended September 30, 2008, respectively. These reductions in unrealized gains are due primarily to the difference in value of our investment in MercadoLibre at the beginning and end of the period and are excluded from earnings and reported as a component of accumulated other comprehensive income. At September 30, 2008, our investment in MercadoLibre had an aggregate unrealized gain of $156.9 million. We do not anticipate any significant realized losses associated with this investment, as our historical cost basis is not significant.

Granted, eBay has the financial strength to weather an economic downturn, with long-term debt-to-equity of less than 10 percent and cash on hand of approximately $3.3 billion. Nonetheless, a loss of $432 million that could be used to for general corporate needs is nothing to be cavalier about -- especially when eBay management just lowered its holiday fourth-quarter guidance and the length of the current downturn is unknown.

On October 16, eBay drew down $1 billion under its revolving credit facility to be used for recent acquisitions, including the online-oriented payment site Bill Me Later. The company has $840 million remaining under the line of credit.

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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