After being starved of new stocks this year, European investors are wasting no time in rushing into initial public offerings. Two payments-processing firms garnered enough demand for all the shares they plan to sell within hours of their deals going live.
It’s clear that scarcity appeal, fintech bling and the potential for M&A are attracting interest. Still, buyers shouldn’t overlook the fact that timing is undoubtedly on the sellers’ side, and what’s for sale isn’t coming at much of a discount.
The larger of the two companies is Nexi SpA, an Italian business which operates across the payments world. From managing merchant terminals to ATMs, it is the largest card issuer in the country. The firm is seeking to raise as much as 2.4 billion euros ($2.7 billion) to allow its private-equity and bank owners to cut back their holdings and reduce a big debt pile.
Meanwhile, Dubai-based Network International, itself a dominant player in the Middle East, is seeking about 580 million pounds ($757 million) in a London IPO that will allow its original founder, Emirates NBD, and its private equity backers to cash in.
Payments firms are a welcome diversification for investors seeking shelter in European financials. Banks are trading at depressed valuations amid stagnating profitability and an unprecedented wave of money laundering scandals.
What’s more, Nexi and Network International offer an entry into the thinly populated payments space. There are few similar plays, and one of the biggest – Worldpay Inc. – is being swallowed up by Fidelity National Information Services Inc. in a $41 billion takeover.
Indeed, the surge in demand for payment services has propelled firms to new records and fueled a deal-making boom. McKinsey & Co. estimates that industry revenue will grow by 9 percent a year to reach $2.9 trillion by 2022 from about $1.9 trillion in 2017.
Europe is expected to be the laggard in that revenue expansion, but Nexi and Network are hoping to buck that trend as digital penetration catches up in their respective markets.
In particular, a young population and growing middle class in the Middle East are set to drive sales expansion at Network International. Annual organic growth could reach 14 percent, surpassing analysts’ estimate for Worldpay (as a standalone business) and France’s Worldline SA. While Nexi’s topline growth may be closer to the 5 percent to 7 percent range, the company has said it expects earnings to growth by as much as 16 percent as capex and one-time items aren’t repeated.
Investors will also consider the possibility that both Nexi and Network could be in play. Analysts at Berenberg see Nexi as a potential target for Worldline. Network has the biggest scale in the UAE, and a $300 million investment from Mastercard Inc. in the IPO could draw attention from potential acquirers.
But consider this key valuation metric. Worldpay’s enterprise value was about 16 times estimated Ebitda for 2020, about the same as Worldline, before its takeover was announced two weeks ago. Based on this measure, neither Nexi nor Network International are giveaways. Nexi is being marketed at a 2020 EV/Ebitda multiple of about 12.5 to 14, while Network is being offered at about 15 to 17.
There are good reasons for investors to be lured by payments’ hot status, and for private equity funds to take profit now. Both Bain Capital and Advent International took Worldpay and Denmark’s Nets A/S public. Worldpay shares traded up following the IPO, while those of Nets tumbled and took almost a year to climb back to the price at which they were first sold to the public. That latter deal, too, was oversubscribed.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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