LONDON (Reuters Breakingviews) - Private equity groups are rushing to bet on financial technology. Permira, Advent and Bain have all recently announced acquisitions of payment processors in the hope of capitalising on the cashless zeitgeist. Blackstone and CVC, which just offered $3.7 billion for UK-listed Paysafe, are placing a double wager.
Paysafe’s quirk is that roughly half its revenue comes from online gambling and gaming. Investors have struggled with the associated risks – notably from its Asian business, which brings in around a fifth of EBITDA. A short-seller’s report alleging unsavoury dealings in China wiped 38 percent off the company’s share price last December. Though the stock recovered, Paysafe still suffers from a stubborn valuation discount to peers like Worldpay and Nets – both acquisition targets themselves.
The buyout firms thus spy an opportunity. They will end up paying close to $4.7 billion for Paysafe, factoring in fees, net debt and the extra borrowings from a $470 million acquisition it announced on Friday. Assume the new owners can quickly sell the Asian business for a fairly modest 5 times EBITDA, their outlay would fall to around $4.4 billion. That’s about 12 times the roughly $370 million of EBITDA Paysafe is on course to make in 2018.
From there, the odds are in the private equity groups’ favour. Assume they fund around 40 percent of the acquisition with debt, that Paysafe’s EBITDA grows at around 10 percent annually for the next five years, and that the owners use about one-third of that to pay down borrowings. At the same multiple of 12 times EBITDA, Paysafe could have an enterprise value of $7 billion, with $850 million of net debt. That implies equity worth close to $6.2 billion at the end of five years – 2.5 times the buyout firms’ original investment, and equivalent to an annualised return of 20 percent.
Put more simply, Blackstone and CVC stand to make a decent return not just from riding the digital payments bandwagon, but for taking on risk that public-market investors are less comfortable shouldering. It’s hardly radical. But ultimately, that kind of willingness to wade into the dicier corners of finance is what private equity is for.
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