Sunday 18 March 2018

Price will only be right for Vantiv's €8bn takeover of Worldpay if there is growth

The global payments industry is growing. Stock image
The global payments industry is growing. Stock image

Lionel Laurent

The global payments industry is growing and its champions must straddle the globe - that's the main reason behind US market leader Vantiv's €8.85bn takeover of Worldpay Group, its British counterpart.

It's not a straightforward bet: the valuation is high, cost overlaps are relatively few and the proposed co-CEO structure is awkward. Everything must grow for Vantiv to justify the price it's paying. On Wednesday, Vantiv put some extra meat on the bone for Worldpay shareholders - without changing the financial terms.

The combined company will now seek a secondary listing in London, something that should allow investors restricted to holding UK stocks to share in any upside created by the deal.

The companies expect to eliminate $200m annually of pre-tax costs within three years of the deal. One-time restructuring and integration expenses are pegged at $330m. The fleshed-out proposals won't move the needle much.

The $200m figure is broadly in line with what analysts had been predicting, based on the most obvious overlap the two companies have in the US market. That suggests the kind of easy cost savings investors like to see are limited.

The US only accounts for about 15pc of Worldpay's underlying Ebitda.

Worldpay shares ticked up 0.1pc, to 384 pence on Wednesday, not far short of the implied 397 pence-a-share Vantiv is offering in cash and stock.

As important is what's not on the page. The prospects for revenue growth, cross-selling and new market opportunities haven't been quantified.

Worldpay and Vantiv together process about $1.5trn of payments annually - and this is an industry in growth mode.

McKinsey expects the global ecommerce market will double in size to about $4 trn between 2015 and 2020.

The duo will need macroeconomic trends to hold up and for clients to follow.

Vantiv has a lot of experience integrating acquisitions, with recent purchases including Mercury Payment for $1.7bn and Moneris USA for $425m.

Yet Worldpay is on a much bigger scale.

Having two co-CEOs, one reporting to the other, will only complicate things.

Some Worldpay investors would have preferred a fatter premium, no doubt, but this is an already pricey acquisition for Vantiv. The target trades at 29 times forward earnings, according to Bloomberg data, a premium to Vantiv and Danish peer Nets A/S.

Looking several years ahead, unhappy Worldpay shareholders may have a point: as spending on technology dwindles, so earnings should rise. With no other bidder on the horizon, though, Vantiv is offering a handy exit route in the short term. In the medium term, a lot will need to go right for Vantiv to justify the price.

As it is, the deal looks like a triumph of hope over easy savings. (Bloomberg Gadfly)

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