The Long and Short
Possible PayPal deal sparks bond put speculation
This material is a Marketing Communication and does not constitute Independent Investment Research.
Payment processor Stripe partnered with Advent International to make an unsolicited offer to take over PayPal Holdings (PYPL: A3/A-/A-) in the last week. The announcement sparked a rally in the share price and, more notably, buying in senior unsecured PYPL debt on the possibility of a potential change-of-control put trigger. While it is early and the outcome remains highly uncertain, the tightening in spreads appears warranted. Investors who monitor the evolving situation closely could book sizable gains depending on whether it results in a highly leveraged buyout.
Stripe and Advent announced a joint takeover bid on July 15 valued at $53 billion or $60.5 per share, which represented a roughly 30% premium to the prior week’s closing price. PYPL shares traded up roughly 20% following the announcement to just under $57 per share or a market capitalization of about $50.3 billion. Some equity shops are already calling for a higher offer price to more properly compensate PYPL shareholders. In debt markets, the lower dollar price, higher duration bonds traded up sharply as investors contemplated the heightened likelihood of an LBO that could result in a $101 change-of-control put trigger (exhibit 1 below). Still, given the private nature of both Stripe and Advent, it remains difficult to judge the likely financial structure of the potential transaction.
All of PYPL’s outstanding debt contains change-of-control debt covenants. This language states that in the event of a change in control of substantially all the assets of the company AND a subsequent downgrade of credit ratings to non-investment grade within 60 days, the company can be forced to buy the debt back at a price of $101. There is a small distinction between bonds issued in 2019 and bonds issued later. The latter language stipulates that all three credit rating agencies must move their ratings below BBB-, while the former 2019 language is limited to just S&P and Fitch. Given the sizable potential costs to Stripe/Advent redeeming all the outstanding debt at a put price of $101 (exhibit 1), it seems very likely that other efforts would be made to reduce outstanding debt without having to trigger the puts. This could include buying bonds in the open market or tender offers that compensate investors handsomely, without the wait or uncertainty of having to execute the puts at the time of the eventual downgrades.
Exhibit 1. PYPL debt capital structure – potential price pick available for a $101 change-of-control put event
Source: Santander US Capital Markets LLC, Bloomberg/TRACE spread/price indications only
This is not the first time Stripe has expressed interest in PYPL. Back in late February, Stripe proposed similar terms for an acquisition. Shares traded up at the time but talks fizzled. The inclusion of private equity firm Advent in the more recent overture presents a more formidable bid with potential outcomes that have a high likelihood of a change-of-control put given that they are likely to come with a large leverage component. With the more recent announcement, bonds seem to be trending with more likelihood of a deal going through as proposed or with similar revised terms (exhibit 2). PYPL issued debt as recently as May of this year.
Exhibit 2. PYPL credit curve versus comparable issuers
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications only
PYPL appointed new CEO Enrique Lores earlier this year after reporting relatively weak results for fiscal full-year 2025. Under new management, the company is in the process of trying to affect a turnaround with substantial restructuring underway given heightened competition across the digital payments sector. Those efforts include a shift to more automation and AI use across the organization – a strategic advantage that a potential merger with Stripe might actually offer. Nevertheless, these ongoing efforts could make PYPL less receptive to this or other revised offers, if the management team remains committed to their current course of action and shareholders do not see adequate compensation in selling. It is worth highlighting that PYPL valuation peaked during Covid with a market capitalization north of $280 billion. It is the more recent operating challenges and related share price pressure that have made the platform more susceptible to a takeover.
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