Private equity has continuously cheering the fintech party. Francisco Capital’s purchase of electronic payments specialist VeriFone Systems Inc. helped to lift shares of French rival Ingenico Group SA on Tuesday amid speculation more deals will follow. All this looks more like a hangover cure than a new spin on the dance floor.
While the underlying story of electronic payments is one of growth, as the use of cash declines and online spending booms, some of the biggest players are starting to run out of steam. VeriFone and Ingenico dominate in payment terminals, an increasingly saturated market, while a new breed of more mobile focused start-ups such as Square is gaining ground.
A tepid growth outlook for 2018 has wiped about 15 percent off VeriFone and Ingenico’s shares this year, a sign that their recent acquisition sprees aren’t paying off. Ingenico’s CEO Philippe Lazare recently insisted his company was a predator rather than prey — but the markets appear to disagree.
This is all likely to be a boon for private equity, which has been instrumental in creating, merging and restructuring payments processors — and fueling hyped-up valuations across in the industry in the process.
Terminal providers are on the defensive, and public-market investors are impatient for results. Why not take these bruised companies private, diversify and restructure their business away from the public eye, and exit them at a multiple closer to a fresh Silicon Valley start-up?
That’s easier said than done, considering the amount of value-destroying mergers the industry has seen in the past. Ingenico shareholders have been particularly hurt: The firm spent 1.5 billion euros ($1.9 billion) last year on the biggest acquisition in its history, Sweden’s Bambora, bought — of course — from a private-equity firm.
Ingenico paid a high multiple and used debt to fund the purchase, designed to help it diversify away from hardware and into payment processing. The revenue and profit growth so far hasn’t justified the deal.
On a price-to-earnings basis, Ingenico now trades at a discount to its peers, so there might be an opportunity for patient capital willing to slog it out through years of integration. VeriFone’s buyout valued the company at about 20 times forward earnings, according to UBS, a multiple which, if applied to Ingenico, would imply a more than 20 percent upside to the stock price today.
But including debt, Ingenico is hardly cheap — it trades at a slight premium to peers in terms of enterprise value. There is unlikely to be a long list of buyers knocking at the door.
One deal, even of the size of Verifone, doesn’t make for much of a party. The payment processors, the elder statesmen of fintech, have their work cut out in digesting past deals and fending off upstart competitors. Private equity looks like it will be the ultimate winner in this round of M&A — even if the prize is expensive.