This $8.6 Billion Fintech Is Not Quite Cheap Enough
(Bloomberg Opinion) -- Consolidation in the digital payments industry has traditionally meant bold deals to buy fast-growing assets at sky-high valuations — with the acquirers often cheered on blindly by investors. Worldline SA has chosen a different path: A modestly expensive deal to buy struggling French peer Ingenico Group SA. Shareholders have frowned. Worldline Chief Executive Officer Gilles Grapinet must be wishing he’d stuck with convention.
Ingenico has been a bid target for some time. It is weighed down by a handheld terminals business and has been playing catch-up in online payments. Late 2018 brought a management and strategy reset with the appointment of former Visa executive Nicolas Huss as CEO. Natixis SA, a French bank, dropped plans for a possible takeover not long afterwards, sending Ingenico shares to just 45 euros apiece. Just over a year later, Worldline is offering a combination of cash and its own stock that’s worth 123.10 euros a share based on its last closing price. That values Ingenico’s equity at 7.8 billion euros ($8.6 billion).
Maybe Worldline should have moved sooner, but it would have struggled to coax its target to the table before now. An attempt at a deal last year would have been blatantly opportunistic, with Ingenico’s shares on the floor, and Huss’s elevation has bolstered the company’s bid defenses. Grapinet would have needed to offer a much bigger premium than the 17% that has secured this deal. What’s more, the transaction value of 15 times expected 2020 Ebitda is relatively sober in this part of the fintech sector. Fidelity National Information Services Inc. paid 29 times trailing Ebitda for Worldpay Inc. in July. Denmark’s Nets A/S succumbed to a leveraged buyout at 18 times Ebitda in 2018.
The lower valuation reflects the fact that Worldline is not acquiring a business firing on all cylinders. The deal starts to look more pricey when you consider what the buyer is getting. Based on Ingenico’s expected financial performance for 2020, the starting return on the total 9.5 billion euros all-in cost (including assumed net debt) would be just 4%. Worldline reckons it can extract 250 million euros of financial benefits come 2024, when analysts forecast Ingenico could generate about 720 million euros in operating profit. Adjusting for tax, the returns might then get to a more reasonable 8%. Still, investors have to wait for it.
What's more, Worldline’s board would expand to an unwieldy 17 members, including a director from the French state investment bank.
Might things turn out better than Worldline’s shareholders believe? Grapinet has some options to do more than simply finish the recovery that Huss has started. One possibility would be carving out Ingenico’s terminals business and auctioning it to private equity firms. That would leave him with faster growing operations and help bring down net debt, which is likely to touch 2.5 times Ebitda after paying 2 billion euros for the cash part of the deal.
It’s a reasonable piece of M&A, but no more. Investor caution is understandable. There may be higher quality targets out there. The snag is that Grapinet would have to overpay even more to get them.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
©2020 Bloomberg L.P.