M&A In Full Swing

• Back in January, we commented that the $22.7bn takeover of First Data by Fiserv could kick off a new wave of consolidation in the payment processing industry which is perfectly suited for M&A in our view as it enjoys secular revenue growth (digital payments gradually replace cash) and is highly fragmented and scalable (increased volumes allow to better leverage high fixed costs).
• We didn’t have to wait long as Fidelity National Information Services (FIS) announced today the takeover for $35bn of Worldpay, a leading US payment processor with a strong online/mobile presence. Worldpay is a large position in both our Mobile Payments and Fintech portfolios.
• While the deal is a no-brainer from FIS’s standpoint as it provides the company with a fast-growing asset and will allow the company to dramatically improve its growth profile (from 3.5-4.5% currently to 6-9%) and hence its valuation ratios, we have a couple of caveats regarding the premium offered to Worldpay shareholders (+14%) and the expected EBITDA synergies estimated at $700m (or a +13% boost to combined 2019 EBITDA) which are well below the +29% premium offered to First Data shareholders and the $900m synergies announced by its acquirer Fiserv.
• This could open the door to a higher bid. But admittedly, the odds are pretty low as few players can allow to acquire Worldpay. Among them, we would mention PayPal and Square but our guess is that they are more focused on smaller targets and pure digital players.
• That being said, the transaction structure as of today (mainly share exchange, plus a small portion of cash) will give Worldpay investors the opportunity to benefit from upcoming EBITDA synergies and EPS upside.
• Aside from the positive impact on the Worldpay stock price, this deal confirms that M&A is a secular trend in the payment processing industry that should boost the valuation of most assets.
• Specifically, we remain convinced that European players are attractive targets 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 has probably already caught the attention of many processors (admittedly, an acquisition of Wirecard would require a thorough due diligence in light of the recent accounting concerns).
• In the US, Global Payments, TSS, EVO Payments or Euronet could find themselves isolated following the two recent major deals and could hence be tempted by the M&A route.
• In all, we keep pushing our Mobile Payments and Fintech themes, 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 20x for double digit EPS growth) and M&A potential.