Overview of the deal
On Monday the 2nd of November 2020, NEXI SpA announced that it has agreed a 10-day exclusivity period with Danish payment specialist NETS to reach a merger agreement. It would take the form of an all-share merger with the aim to “create the leading European player in the digital payments landscape, with unparalleled scale, technology, capabilities and product portfolio, to serve as a “one-stop-shop” to a wide range of customers”, the announcement says.
This new acquisition project comes just after the merger of NEXI with SIA, its main competitor in the payment sector in Italy. This merger, which happened only one month ago, is part of NEXI’s strategy to grow fast and become the leader of the European market for payments. NETS then appear to be a choice ally in this shared ambition. Indeed, NETS is also pursuing a strategy of concentration, and has for example acquired the leading Swiss payment terminal provider CCV Schweiz SA and the Polish payment services provider Polskie ePłatności (PeP), both in October 2020.
Therefore, NEXI’s acquisition of NETS is a big step in the formation of a European giant in the payment sector, in which consolidation is intensifying as Worldline overtook Ingenico in October 2020. “If we look to the future, in 5 to 10 years, we will have 2 or 3 major pan-European players ... and with NETS and SIA, we want one of these platforms to be Italian.” – Paolo Bertoluzzo, NEXI’s CEO, at his speech during the Salone dei pagamenti (Payment fair) on the 4th of November.
Company Details: Acquirer – Nexi SpA
NEXI is an Italian firm specialized in providing payment services to banks, individuals, businesses, institutions, and the public administration. Its solutions go from credit card to acceptance systems. The firm has benefited from the pandemic since it has pushed to the use of contactless payment, especially in Europe. NEXI S.p.A. derives most of its sales from its home country, Italy. The company generated 54.7% (€538.99 million) of its sales in the country, around Milan, and 49.3% in 2019 (€813.71 million), showing therefore a strong international development. Its sales breakdown is divided into three segments: merchant services & solutions (48.7%), cards and digital payments (39.4%) and digital banking solutions (11.9%).
Its majority shareholder is the holding company Mercury UK Holdco Ltd., owning 20.1% of the company. Its second majority shareholder with 10% of NEXI, Intesa Sanpaolo S.p.A. is a leading Italian banking group whose activity is organized around retail banking, the sale of classic and specialized banking products and services and corporate and market investment banking.
Company Details: Target - Nets
NETS is a Danish provider of payment acceptance services for merchants across channels (in-store, online and mobile). It also provides card management and fraud & dispute services to European banks. NETS is represented in 20 countries across Europe and has 4 100 employees. Nets is serving more than 260 000 corporates and is trusted by more than 250 banks. The firm is powering 700 000 merchant outlets, including 140000 ecommerce merchant outlets. Eventually, it is managing 9.1 million digital identities.
The private company is controlled by the American investment fund Hellman & Friedman. Based in San Francisco, New York and Los Angeles, Hellman & Friedman business and strategy is to invest in media, financial services, information services and financial technology firms such as NETS.
Synergies
"The potential combination would create the leading European Player in the digital payments landscape, with unparalleled scale, technology, capabilities and product portfolio, to serve as a "one-stop-shop" to a wide range of customers. » (NETS)
The merger between Italy's biggest payments group NEXI and Denmark's NETS is valued at nearly €7.2 billion euros. The synergies resulting from such a transaction are revenue related and are valued at no less than €150 million.
Indeed, the group formed by the merger between NEXI and NETS could eventually become one of the European leaders in electronic payments, all the more so as NEXI also bought its colleague SIA for 4.6 billion euros last October. This operation could even make the new entity - whose market capitalisation is expected to reach 22 billion euros - the player with the most revenues in Europe, surpassing the French champion resulting from the recent merger of Worldline and Ingenico. "NEXI's merger with the NETS group would be part of the rapid international and European consolidation in the digital payments sector already underway with the announced merger with Sia," explains NEXI in a release.
The Italian electronic payments specialist would also be able to enter new markets by acquiring NETS and gaining a foothold in the Nordic countries. NEXI boss Paolo Bertoluzzo sees his Danish competitor as a springboard to lucrative European markets, including Denmark, Germany, and Poland. Moreover, as electronic payment services are particularly advanced and mature in this geographical area, NEXI could potentially benefit from certain technologies developed by its Danish competitor, enabling it to reduce its costs and maximise its profits.
However, it is still difficult today to assess the long-term consequences of such a merger as it is still at the negotiation stage.
Risks and uncertainties
As with any M&A transaction, the combination between NEXI and NETS involves risks and uncertainties, linked on the one hand to the current context but also to the structures of the companies concerned.
On the one hand, the current health crisis presents a risk for the transaction linking NEXI and NETS. Indeed, NEXI is waiting for market volatility, which has increased due to the second wave of covid-19, before entering into a binding agreement with NETS. Indeed, the company is waiting for the share price to recover as the pandemic has again reduced consumer spending, which means that payment volumes have decreased. Therefore, the feasibility of the deal depends directly on the evolution of the health situation, which will determine whether it can be postponed or even cancelled.
On the other hand, some complications could emerge as a result of NEXI’'s acquisition of NETS and the Italian fintech company SIA. If the two agreements can a priori be executed in parallel without the takeover of NETS jeopardising the transaction with SIA, a significant risk arises. The purchase of Nets could indeed dilute the Italian public investment agency Cassa Depositi e Prestiti (CDP), which controls SIA and was supposed to own 25% of the new group, making the latter the largest shareholder. This detail could well complicate or even jeopardise the two potential acquisitions by Italy's NEXI.
Financial consequences on NEXI’s group
As this merger is an all-stock deal, meaning that NEXI will only issue new shares to acquire the Danish company, the control of NEXI over the new entity will be shared to a great extent with NETS. As matter of fact, according to our analysis, NEXI SPA former shareholders will keep a 54% control on the new entity while NETS former shareholders - the main shareholder is the US private equity firm Hellman & Friedman - will own 46% of the new group. NETS will then be granted a strong power over the decision making of the new entity. On the opposite, NEXI SPA former shareholders, whose power should already decline by 30% after the merger with SIA, will see their control on the company drop significantly after the merger with NETS. For example, the holding company Mercury UK Holdco, the current major NEXI’s shareholder with a stake of 20.1% should only control 7.6% of the company after the two operations.
In terms of leverage, NEXI should benefit from its operation. The Italian company, which has recently been downgraded by the Fitch rating agency - BB- since July - must keep an eye on its debt level in order to restore the investors’ trust. Its net debt to EBITDA ratio is on the rise, with a current value of 2.9x, and NEXI is now considered as speculative according to rating agencies. This is therefore a reason why NEXI has opted for a 100% shares deal. No other deal payment structure could really be considered, as the least cash component would raise the debt and the pressure of rating agencies on NEXI as well. This all-stock deal will allow the company to reach a ratio of 2.5x - a 13% decrease - which should be positively welcomed by the market. Yet, this target indebtedness ratio remains quite dependent on the completion of the €150 million expected synergies, otherwise the ratio would remain roughly at the same level as NETS already has a net debt of nearly €1 billion.
The Italian company will also benefit from an Earning Per Share accretion as the new entity should have an EPS of 0.22, which represents an increase of 26% compared to NEXI current EPS of 0.17. This projection is based on a €114 million post-tax synergies generated by the deal. According to our estimations, the deal would be accretive as far as synergies before taxes are over €80 million, ie 53% of expected synergies.
Is NEXI - NETS merger fairly priced?
Considering an adjusted EBITDA of €400mn for NETS, as specified by NEXI in the last press release about the merger, and a net debt of €994.5mn (as of FY2019), the EV/EBITDA multiple for this transaction would be 20.5x, which seems quite high, all the more so as this deal appears to be friendly. Let us now compare this multiple with recent transactions in the payments industry.
The last consequent transaction in the industry was the merger between NEXI and SIA, announced early October. Based on financial data provided by NEXI on this €4.56bn deal,the EV/EBITDA transaction multiple would be worth 15.2x, much lower than the one used to value NETS, for the same amount of operating cash flows synergies expected (€150 million). The ongoing acquisition of Ingenico by Worldline was also priced on a 15x EV/EBITDA basis, a ratio that seems to be the average for comparable transactions in this industry. But does it mean this deal is overpriced for NEXI?
We first have to remind that this €7.2bn implied equity value is an estimation from Reuters and not the official number. Indeed, as NETS is a private company, the deal value has not been disclosed. An overestimation could lead to a significant decrease of the EV/EBITDA transaction multiple, converging towards the 15x average.
A reason for such an acquisition premium could be the international dimension of this strategic deal. Indeed, whereas NEXI-SIA and Worldline-Ingenico M&A deals were intended to strengthen the companies’ position on local markets, respectively Italy and France, the ongoing operation aimed to expand the activities of the Italian player towards the promising Nordic market. This criterion has undoubtedly been considered while negotiating the price between NETS and NEXI’s shareholders. Yet, as said before, the deal size has no important financial consequences on NEXI’s group, as no cash will be spent for the operation.
All things considered, the big winner of this upcoming deal between NEXI and NETS should be the American investment fund Hellman & Friedman as it will become a large shareholder of a new European leader in the payment industry, due to the high implied NETS equity value paid, and could benefit from significant synergies in a fast-growing market.
Hector de Vergeron, Dongho Shin, Philippe Cardinaletti, Ethan Stofize & Leo Clément