Fintech & Mobile Payments Update: M&A Is Back
16 January 2019
- After the M&A frenzy of summer 2017, it looks like big M&A is back in the payment processing space with the $22.7bn takeover of First Data by Fiserv announced on January 16, 2019, following a string of multi-billion transactions completed in recent months in the non-listed space, including the acquisitions of iZettle and SIX Payments Services by PayPal and Worldline, respectively, and the merger of Nets with Concardis.
- The transaction multiples are clearly not fancy (13.5x 2019 P/E, well below peers) but this is justified by First Data’s weak fundamentals, as the company is a legacy player (meaning it has a low exposure to online/mobile) growing much less than its rivals (around 5% vs. 10-30% revenue growth on average).
- Anyway, this transaction could kick off a new wave of consolidation in the industry which is perfectly suited for M&A in our view as it enjoys secular revenue growth (digital payments - credit/debit cards, online and mobile payments - gradually replace cash) and is highly fragmented and scalable (increased volumes allow to better leverage high fixed costs).
- Despite the initial negative reaction on Fiserv (part of our Mobile Payments and Fintech portfolios), it’s worth noting that the financial rationale of the deal is a no-brainer with Fiserv expecting the acquisition to be more than 20% EPS-enhancing in year one and 40% EPS-enhancing once the full $900m in cost synergies are achieved in five years. Hence, we believe that other companies with sufficient financial firepower will try to expand their digital capabilities and geographic footprint and show off the scalability of their business model through acquisitions.
- Against this backdrop, European players are likely to attract the most interest in our view in light of their rather small size in an industry where scalability is key (their average market cap. is around EUR10bn vs. $25bn for US players) and of their respective positionings. While Worldline is a pure play on Europe that could appeal to global legacy players, Adyen and Wirecard’s large digital exposure have probably already caught the attention of many processors.
- In all, we stick to our large exposure to payment processors in our Mobile Payments and Fintech portfolios with a mix of US, European, Asian and South American names, considering that they offer strong growth prospects driven by the digitization of payments, a low-risk profile (strong visibility, high margins and cash-flows), reasonable valuation multiples (P/E around 18x for double digit EPS growth) and M&A potential.
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