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Buyout Firms Gear Up for Swipe at PayPal

NEW YORK (The Deal) -- Make no mistake about it: private equity wants PayPal But a combination of a bevy of bidders, as well as the industry's newfound disdain for club deals, could push an asset valued at more than $35 billion just out of their range.

With activist Carl Icahn rattling his saber at owner eBay's (EBAY - Get Report) digital gates and the company facing lackluster stock performance, a spinout into private ownership for PayPal could be the optimal move. More than a decade after eBay's acquisition of PayPal (then, at a comparatively paltry $1.2 billion), the asset's dependence on the marketplace has been turned into eBay's reliance on its subsidiary, now a fully developed technology company that is fully capable of standing on its own.

There's only one thing standing in private equity's way: Everyone else. Sources said that, while they expected PE players to perk up their ears if and when PayPal hits the block, many potential big technology bidders -- Google (GOOG - Get Report) Apple (AAPL - Get Report), even Facebook (FB - Get Report) -- would have traditional payment processors and credit card companies -- Visa (V) and American Express (AXP) -- nipping at their heels in a rush to outbid each other.

"It's a rare asset because you can expect that guys from a number of sectors will come out," one banker told The Deal.

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Still, if there were a time for PE firms to take another stab at a more successful version of an leveraged buyout approaching $40 billion, factors are aligned for that to happen now, more than at any other point in recent history.

One private equity general partner, whose firm not too long ago reeled in more than $10 billion to put to use in M&A, called the prospect "difficult but not impossible" before saying that, until eBay and its activist settle their differences, he wouldn't even instruct his lieutenants to lift so much as a calculator.

"It's too early to tell," the PE pro said, noting that the company has not yet even made a decision as to whether or not it will divest PayPal, or spinout the company.

Private equity firms rarely commit more than 10% of a fund to any particular transaction, and the LBO shops out there that are likely to have the expertise as well as the balance sheet to support a transaction for PayPal number less than 10. Yet, now, PE firms have more dry powder than ever before: according to Dow Jones & Co. research, the $216 billion raised by LBO shops last year is the biggest since 2008. A substantial portion of those funds raised also went to large-cap LBO shops and, all of a sudden, the $10 billion buyout fund is back in vogue.

One source suggested that four private equity firms together could easily put up the $6 billion that, in the current debt market, might go far enough to leverage a deal. All they would need is for eBay to retain a stake in its spinout, which is exactly what the company did when it unloaded Skype Technologies to a private investment consortium.

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