By Christopher Shim, Robert Szongoth, Karthik Neelamegam, Adit Rajeev, Rohan Shah (University of Cambridge) Mariona Planella Boix (ESADE)
Overview of the deal
Acquirer: Worldline
Target: Ingenico
Implied EV: $11 Billion
Total Transaction Size: $8.6 Billion
Announced Date: February 3, 2020
Worldline has announced its move to acquire Ingenico in a cash-and-share deal that gives Ingenico a valuation of €7.8 billion. Both companies are based in France, and were established during the 1970s and 1980s when these electronic financial services companies first emerged. Worldline emerged from Atos, while Ingenico until this acquisition has been independent. Addressing shareholder concerns, Worldline announced that all Ingenico shareholders would receive 11 Worldline shares along with €160.5 for every 7 Ingenico shares. Pending shareholder and regulatory approval, this merger is expected to close in Q3 of 2020. The current arrangement stands that Worldline’s CEO and Chairman, Gilles Grapinet, will lead the combined company.
The merger of both companies will produce an impressive outcome indeed. Worldline and Ingenico together will have 1200 financial institution customers and 20,000 employees across 50 countries. Furthermore, this merger is a part of a broader trend of mergers in the wider fintech and payments space in Europe, which have totalled up to around €83 billion since 2013. This deal makes the figure now over €90 billion. The acquisition of Ingenico by Worldline is an outsized deal among these recent mergers.
Company Details: Worldline
Worldline is a financial payments company which provides a range of services such as online payments through in-store point-of-sale terminals, fraud and banking protection, and data analytics. Currently ranked as the no.1 company focusing on payment and transactional services in the European market and with a significant global presence, Worldline’s activities are centered around three main business lines: merchant services (aiding commerce with advanced payment services), financial services (consolidating payment processing, incl. digital banking) and mobility & e-transactional services (bringing payment and regulation expertise to new markets). Worldline considers sustainability to be a central pillar of their business model and is as such the first company in the payments industry to have become carbon-neutral, in 2019. Worldline considers M&A and the integration of recent acquisitions as the keys to future growth, with an operational emphasis on online commerce and digital banking.
Founded in 06/14/2010, Headquartered in Bezons, France
CEO: Gilles Grapinet
Market Cap: $13.362 Billion
LTM Revenue: $2.32 Billion
LTM EV/Revenue: 5.99
Number of employees: 11877
EV: $13.90 Billion
LTM EBITDA: $435 Million
LTM EV/EBITDA: 26.04
Company Details: Ingenico
Ingenico is a point-of-sale terminal provider that controls 37% of the market globally. Ingenico's main products are payment hardware, software and secure transaction services solutions: physical payment terminals, contactless/biometric payment technology, centralized management of transaction flows, etc. Ingenico's main customer base consists of banks and the retail sector. In addition to its physical products, the company also offers an ePayment platform for online commerce, representing around 30% of its turnover.
Founded in 2011, Headquartered in Paris, France
CEO: Nicolas Huss
Market Cap: $8.55 Billion
LTM Revenue: $3.16 Billion
LTM EV/Revenue: 3.13
Number of employees: 8669
EV: $9.90 Billion
LTM EBITDA: 546.8 Million
LTM EV/EBITDA: 17.76
Short-term consequences
This acquisition will create a new leading global payments services player, with combined proforma revenues reaching circa €5.3 billion in 2019, €2.5 billion of which is in merchant payment and transaction-related services. Purchase volume acquired is estimated to reach €300 billion and the NewCo’s market share is expected to rise to a fifth of European Financial Services, which will help consolidate Worldline’s current position inside the European payments space. In the online payment acceptance area, Worldline will rank third, with approximately 250,000 e-commerce customers and websites. Moreover, the NewCo’s value chain coverage will also be the vastest in the industry, consisting of solid positions in last-gen payment systems.
The deal will immediately extend Worldline’s geographic scope both within Continental Europe and globally, allowing the combined group to offer seamless cross-border payment transactions, which will be an important commercial benefit. Worldline has traditionally been a leading player in Belgium, Netherlands, Luxembourg, Switzerland and Austria. Ingenico’s presence in the Nordics and France will strengthen Worldline’s position in those economies as well, improving access to French banks and merchants in particular. The contribution of Worldline’s Merchant Services’ activities in Germany and Austria would reinforce the NewCo's controlling position in Payone (the joint-venture between Ingenico and the Deutscher Sparkassenverlag), creating a new leadership position in Europe’s strongest economy. Regarding the global landscape, the deal will provide Worldline with enhanced access to the US, augment Worldline’s exposure to Latin American and APAC-based merchants, and facilitate growth in countries with historically low card penetration.
Long-term Upsides
The deal provides significant financial synergies to the combined entity, increasing price competitiveness through economies of scale and competition with smaller, more agile fintech competitors. There are expected revenue synergies of c.€100 million by 2024, contributing a €30 million OMDA impact as well as €190 million run-rate cost synergies at OMDA level. 85% of these OMDA impacts are in Merchant Services, which will form 50% of revenue for the combined company. These synergies will be fully realised in 2025 with the majority coming from cost cutting and rationalisation of duplicate operations. The larger scale of the company will also contribute to €30 million additional savings from optimised capex and rent & lease; as a large company they can secure better interest as well as further optimise their structure to gain financial benefits below the OMDA level. Combined, these benefits will contribute to double-digit OMDA growth through synergies realisation and operational gearing. There is further upside savings potential through additional rationalisation of purchasing and platform, internalisation of subcontracted services and optimisation of terminals.
Secondly, the OMDA growth will contribute to a stronger long-term financial position for the company through deleveraging and stronger cash flow. Due to the synergies, the combined company can deleverage from 2.5x to 1.5x leverage ratio (Net Debt/OMDA) after 12 months, maintaining a BBB rating and robust balance sheet. This will further contribute to double digit and immediate EPS accretion for shareholders, increase the appeal of Worldline shares and incentivising further equity investment. With only 19% of the transaction being funded by cash (c.€2 billion) and 81% being funded by equity, Worldline will still have significant cash holdings to weather COVID, as well as engage in further consolidation of smaller players to expand its geographic scope and reinforce dominance in Europe. Given the market landscape and multitude of smaller fintech competitors that are challenging incumbents such as Worldline, this further consolidation will be essential to continue rationalising costs and diversifying their offerings as a company. Nexi and SIA/SSA in Italy, Sistema 4B, Redsys and perhaps Sibs in Portugal could all be potential future acquisitions for the company.
Risks and Uncertainties
The competition in the market for payment terminals is fierce. With the rise of the digital trend, new entrants have continued to disrupt a fragmented payments industry. Key factors influencing competition in the industry include the international expansion of service providers based in emerging countries and the entry of large companies previously focused on secure electronic transaction processing. The entry of competitors using potentially less secure and transparent solutions based on open platforms may seek to break into the payment terminal industry. In response, many incumbents have embraced consolidation as a means of fostering growth and protecting market share.
Ingenico is paying the price for not having diversified fast enough beyond its core business - card terminal payments installed in stores across Europe - and into the online retail space. Despite the progress made in the last year (10% revenue growth in comparison to 6.9% for Worldline’s) there is scope for improvement relative to the Digital Payments Market (14.2% CAGR in Transaction Value, yoy), and the combined enterprise is still far from the $15.8 bn Adyen’s valuation for its IPO in 2018.
Examples like Adyen, Stripe and Klarna show that organic growth and innovation by positioning on attractive segments like e-commerce and mobile commerce proves to be a successful strategy too. These companies have been able to develop from scratch relatively small markets with no major volumes. These players focus on R&D and innovation to accommodate increasing customer expectations and leverage the appearance of state-of-the-art technologies (smartphones, NFC, beacons, VR, AI) as well as security requirements (behavioral scoring, authentication methodologies, tokenization). Failing to seize the emergence of these breakthroughs can have unforeseeable consequences for Worldline - Ingenico.