PayPal to invest $750M, and Dragoneer $100M, into MercadoLibre, Argentina’s e-commerce powerhouse

It’s not only SoftBank that’s eyeing up the opportunity to tap into the quickly expanding market for e-commerce in Latin America. MercadoLibre, a marketplace and financial services powerhouse based out of Argentina and serving 18 countries across the region, has announced that PayPal is investing $750 million, and investment firm Dragoneer another $100 million, as part of a $1.8 billion equity offering to grow its business — specifically to expand the functionality of its e-commerce platform, improve its logistics infrastructure and invest in financial technologies “that further solidify the company’s position as a powerful provider of inclusive end-to-end financial technology and payments solutions.”

The remaining $1 billion of the equity offering will be offered as common stock, the company said. PayPal and Dragoneer’s investments are contingent on the company raising the remainder publicly, although judging by the company’s track record as a public stock, and the fact that PayPal also announced this news on its own site, it doesn’t appear the parties are in great doubt about the deal’s completion.

MercadoLibre is traded on Nasdaq and currently has a market cap of $21.75 billion.

The investment is both a financial and strategic one for MercadoLibre and PayPal.

After getting spun out from eBay several years ago, PayPal has been on a mission to diversify its customer base to include a wider variety of use cases and partnerships to power payments for different marketplaces.

“Digital commerce in Latin America is experiencing tremendous growth and MercadoLibre is well-positioned for continued leadership,” said Dan Schulman, president and CEO, PayPal, in a statement. “We’ve been impressed with the digital commerce and payments ecosystem Marcos and his team have built. We see great opportunities to integrate our respective capabilities to create unique and valuable payment experiences for our combined 500 million customers throughout the region and around the world.”

The two have already worked together and the financial commitment PayPal is making here not only will help it reap dividends from MercadoLibre’s business growth, but also ensure that it integrates ever more of its features in prominent ways to drive more transactions on its own rails. And given how payments is actually more localised than many people might assume, it also gives the company a direct pipeline into tracking and catering to consumer and merchant tastes and preferences when it comes to buying and selling goods and related financial services.

“Over the past 20 years, we have heavily invested in developing the preeminent e-commerce and FinTech ecosystem in Latin America,” said Marcos Galperin, CEO of Mercado Libre, in a statement. “We are excited to welcome these investments which will allow us to significantly accelerate our growth. We look forward to accelerating our leadership in ecommerce and payments and foster financial inclusion in Latin America as a result of our alliance with a global leader in the industry such as PayPal.”

At a time when more mature markets like the U.S. and Western Europe are slowing down in their e-commerce growth (while still remaining huge markets in their own right), the opportunity in developing markets like Latin America is a big one.

As SoftBank revealed last week when it unveiled its own $2 billion fund to back tech startups in the region, more than 50 million people in the region are now categorised as “middle class,” with increased disposable income. The region accounts for 10 percent of the world’s population and 8 percent of the world’s GDP, two times the GDP of India and half that of China. There are some 375 million internet users and 250 million smartphone users, putting it ahead of the U.S. in terms of sheer numbers.

Moreover, retail e-commerce has nearly doubled in the last three years, going to $54 billion in 2018 from $29.8 billion in 2015, figures that have definitely fueled MercadoLibre’s own growth. In 2018, the company sold more than 334 million items, amounting to over $12 billion of gross merchandise volume. Payment transactions on MercadoPago, its payments business unit, increased by 70 percent during 2018, totaling 389 million transactions and $18 billion of total payment volume, the company said.

At the same time, these are nascent numbers: some 400 million people are still without bank accounts or credit histories in the region.

In terms of the other big investor being announced in this round, Dragoneer is a legendary and very experienced investor when it comes to interesting opportunities in e-commerce. The company has stakes in other giant regional e-commerce marketplaces like Alibaba and Flipkart; disruptive “gig economy” leaders like Airbnb, Uber, DoorDash and Instacart, as well as a plethora of other huge startup names like Slack and Snap. It seems MercadoLibre is currently the top bet for not only competing against the likes of Amazon, but a range of smaller local players that are also looking to tap into this quickly expanding economy — in other words, the same opportunity SoftBank is chasing, but from the other end of the field.

“Through its investments in FinTech, logistics, and customer experience, MercadoLibre is solidifying its leading market position in e-commerce and digital payments across Latin America, and we believe we are witnessing a major tipping point in the region,” said Marc Stad, founder and managing partner of Dragoneer Investment Group, in a statement.

“We’ve known Marcos and his team for over a decade and are thrilled to partner with them through this high growth and transformative period.” Goldman Sachs is acting as sole financial advisor to MercadoLibre on the PayPal and Dragoneer investments, and Cleary Gottlieb is serving as MercadoLibre’s legal advisor. Goldman Sachs, J.P. Morgan and Morgan Stanley are acting as joint bookrunners on the public equity offering.

As a side note, it’s interesting to consider the approach that MercadoLibre is taking with this round. PayPal’s investment is coming in the form of a purchase of common stock, while Dragoneer’s is coming by way of an affiliate that has agreed to purchase $100 million of Series A perpetual convertible preferred stock, with the rest to be raised publicly. When you consider how Lyft, and likely Uber, and many other very highly valued, high-profile scaled startups are likely also to list publicly, this could end up being a route that we see getting used more often when these companies, which are all still operating at a loss and will need to raise capital, might opt to take, too.