In the last six months we have seen some of the biggest names in payments, especially in the last few weeks announce, “strategic reviews of their businesses”.
Sales, demergers, spin offs…what’s behind the trend?
It seems to us here at Payments Cards & Mobile that in each instance the real reason is shareholder pressure to maximise the value either of an assets on its own or decouple assets from larger entities to support growth and value for the parties.
Lets look at this from the historical point of view.
Tietoevry Banking Unit
At the end of July 2022 Tietoevry announced a strategic review of its banking business, Tietoevry Banking.
The review lead to the separation of the banking arm into an independent firm listed on the stock exchange.
Tietoevry hopes that the change accelerates the growth profile, scale, and profitability of Tietoevry Banking, while enhancing its strategic and financial flexibility.
The spin-off would allow Tietoevry to shift its focus on the group and realise the value of its businesses
“We are announcing a key decision to take our strategy forward. As an independent entity, we believe that the business would have higher focus, build a clear financial services software identity to attract the best talent and enhance the value to its customers. This would potentially unlock further value for Tietoevry shareholders,” said Kimmo Alkio, president and CEO, Tietoevry at the time.
Tietoevry is expected to complete the carve-out process in H2 2023.
FIS separates from Worldpay
They say corporate mergers fail more often than marriages… So it seems is the case for Fidelity National Information Services (FIS) as it unveiled plans to spin-off Worldpay, the business it acquired for $43 billion four years ago.
Today, FIS is worth $38 billion after dropping 42%of its value in a year.
FIS entered merchant payments by acquiring Worldpay. Including debt, FIS paid the equivalent of 24 times EBITDA. Arguing that more scale would produce more profits, it predicted that the combined companies would generate $15 billion in revenue and up to $4.5 billion in free cash flow within three years.
Unfortunately the merger was plagued by an inability to successfully integrate the two companies and the rise of FinTechs that were able to offer a better service to merchants very often at a cheaper price.
The case for spinning off Worldpay seems straightforward enough.
FIS shares trade on an enterprise value to forward EBITA of less than 9 times, according to FT analysis. Apply sector median multiples to FIS’s three main business segments — Banking, Merchant, and Capital Markets — and FIS could be worth around $64 billion. That is about 68% more than its current valuation.
Finastra courts a buyer
Finastra is owned by buyout firm Vista Equity Partners and is rumoured to be exploring the sale of its banking unit for as much as $7 billion.
The company is in the process of carving out the business known as universal banking, which provides software to banks and credit unions to run core processes, as it prepares to kick off a sale process in the coming weeks.
Finastra is working with a financial adviser as it explores options for the business, which currently generates about $1.7 billion in revenue and roughly $500 million of EBITDA.
What we believe we are witnessing here is the end of the mega-merger as witnessed over the last few years across payments industry where massive companies could really only buy or merge to gain the growth necessary to maintain the relentless growth required by shareholders.
As has been well documented at the other end of the spectrum, FinTech companies are struggling under the dual weight of market tightening as well as changing dynamics in the cost of borrowing – investor expectation should also not be underestimated.
Perhaps similar pressures are also beginning to take their toll at the top of the pyramid as well.
The post Sales, demergers, spin offs…what’s behind the trend? appeared first on Payments Cards & Mobile.
