M&A in the Payments Industry: Current Trends
Presenters Ray Sobczyk Jim Zipursky Senior Associate Chairman & CEO The Strawhecker Group Corporate Finance Associates Worldwide
Presentation Overview Overall M&A Market Conditions Today Current Trends in M&A in the Payments Industry What Can You Do To Enhance the Value and Marketability of Your Business 4
Global M&A Activity 2018 Global M&A # of Deals Global deal volume (deal count) at record high in 2018 3.5% increase from 2017 to 2018 20,582 transactions Global deal value (total transaction value) increased YOY from 2017 but below peak in 2015 2018 Global M&A Transaction Value 12.5% increase from 2017 to 2018 $3.56 trillion in 2018 Average Transaction Value Increased by 9.1% from 2017 to 2018 5
USA M&A Activity USA M&A activity declined from 2017 to 2018 11.0% decline in total transactions Transaction volume lowest since 2013 However, M&A transaction value increased from 2017 to 2018 6.9% increase in total transaction value Deal al V Val alue ( e ($B) De Deal C Coun unt 2008 $1,062.5 7,786 2009 $629.6 6,162 Average Transaction Value increased as well from 2010 $930.0 7,828 2011 $1,043.0 8,924 2017 to 2018 2012 $1,235.7 9,980 2013 $1,148.0 9,427 2014 $1,687.6 11,898 20.1% increase in average transaction value 2015 $2,028.4 12,837 2016 $2,129.8 11,557 2017 $1,926.5 11,175 2018 $2,059.1 9,945 6
Current M&A: Private Equity Deals Private Equity Transactions accounted for 34% of North American and European Transactions Private Equity Transactions in the USA up 6% 2017 to 2018 Private Equity Transaction value in the USA up 17% 2017 to 2018 7
M&A Transaction Multiples: EBITDA Median North American M&A EV/EBITDA Multiples We are seeing a “softening” in the market in terms of deal valuations 2018 median EBITDA multiples down 4% from 2017, which was the watermark for valuations Despite the decline, valuations remain at near record levels, on par with pre-Great Recessionary levels 8
M&A Transaction Multiples: PE Transactions Transaction multiples in Private Equity transactions remain consistent, though there is softening in valuations for smaller transactions Private Equity transaction multiples are heavily influenced by availability and pricing of debt, as well as Senior Debt to EBITDA multiples/covenants 9
What continues to drive the market? Availability of inexpensive capital and excess cash continues to drive today’s M&A market 10
What is driving this market? The available of affordable debt continues to drive the M&A market PE Deals fit into a 3x4 “Debt Box” We have not (yet) seen the return of “silly” lending we saw in the run-up to the Great Recession The Prime Rate is effectively lower than S&P Returns, essentially leading to free money for those who borrow for acquisitions 11
Return of the IPO In the USA, we have seen an increase in IPOs in the last few years, especially in the Tech and Financial sectors In the USA, IPOs are returning to pre-Great Recession levels Globally, IPOs are down, especially in Europe 12
Attractiveness of Payments Efficient Economic Model Recurring and predictable revenue model Economic resiliency – manage spread Leverage the platform cost and expand margins Relatively low investment to grow Manageable risk Attractive Growth Industry Feeds off of organic economic growth (inflation and GDP) and increased consumer usage Differentiation via verticals and expertise Expandable services – opens up to other products to merchants Employee talent in the marketplace Fragmented market – roll up strategy potential 13
TSG Payments Index Payments companies values have increased over two times the rate of the industry average $547 $547 VS. $600 +23% CAGR $500 $400 $300 $214 $214 $200 +10% CAGR $100 TSGPX S&P 500 $- Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 201 2011 201 2012 201 2013 2014 201 2015 201 201 2016 2017 201 2018 201 2019 201 14
Where is the Opportunity in the Market? In the U.S., the top 100 merchants make up 38% of debit/credit card volume, 3.5% of the merchant outlets, and less than 5% of the net revenue to merchant acquiring companies. Merchants outside of the top 100 make up 95% of the revenue opportunity. Merchant Share in the U.S.: Top 100 Versus “All Others” Dollar Volume Merchant Outlets Net Revenue to Acquirers 3% 5% 38% ~$6 Trillion ~ 8 Million ~$25 Billion 62% 97% 95% Top 100 U.S. Merchants All Other Merchants Net Revenue = Gross Revenue + Other Income – Cost of the Transactions Other Income Cost of the Transactions: • Equipment revenue • Interchange • Lease revenue • Assessments and network fees • Additional service revenue • Residuals paid to sub-ISOs • Monthly fees • Third Party Processing Costs 15
Key Industry Growth Metrics Consistent growth while holding spread Database SMB Averages – Dec. TTM 2015 2016 2017 2018 3-Year Change (% of volume, ex. where stated otherwise) Total Volume per Active Merchant $182 $189 $196 $208 +4.5% CAGR (000s) Total Average Ticket $92 $92 $95 $98 +2.2% CAGR Net Revenue per Merchant per Month $138 $140 $142 $145 +1.7% CAGR Gross oss Amou ount C Charged t to o the Me Merchant 2.70 2. 70% 2. 2.69 69% 2. 2.62 62% 2.59 2. 59% 0. 0.87 87% 0. 0.84 84% 0. 0.89 89% 0.91 0. 91% 1.86 1. 86% 1.83 1. 83% 1. 1.73 73% 1.69 1. 69% 201 2015 2016 201 2017 201 201 2018 Total C Tot Cos ost of of S Sales Total al Net et R Rev even enue 16
Market Transaction Comparables If a net revenue multiple was truly meaningful, the plots would be clustered in one area of the chart Timef efram ame: : 2000 2000 – 2018 2018 Data ta S Set: t: 100 Tra 100 Transactions Red Pl Red Plots: 2010 2010 - 2018 2018 Purchas ase P e Prices es: : $300K $300K - $30B $30B Average ge ( (2011 2011-20 2018) 18): 3. 3.93 93x Know w ow what y t your b ur busine ness i is worth orth - Get a valuation prior to going to market Don’t c count o on a a magic m multiple le - Comparables can be misleading Every b bus usiness i is uni unique - Concentrated/Diversified - Growth - Attrition - Technology Black = Enterprise Transactions Red = Portfolio Only Transactions - Expense Structure - Large/Small Merchants 17
Enhance the Value and Marketability of Your Business Know Your Business Dynamics Know Your Sales Model Break Even Point Know Your Attrition and Growth Know How Your Performance Compares To Your Peers Know Your Agreements Minimize Surprises to Buyer 18
Know Your Business Dynamics A vibrant sales engine is necessary to out pace attrition Merchant Portfolio Growth Segment Your Sales Channel Performance Base Merchant Sales Engine Net Merchants In House Vs. Sales Agents Busin iness G ss Growth Two Value Components in Merchant Portfolio: 1) Bas ase Me Merchants Sale les E s Engine Cash flows from merchants in place (attrition) 2) Sa Sale les E s Eng ngin ine Cash flow from sales engine Ba Base M Merc rchant Attri Attrition Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q5 Q5 Q6 Q6 Q7 Q7 Q8 Q8 Q9 Q9 Q10 Q1 19
Know Your Sales Model Break Even Point Make sure sales investments pay off Sales Model Break Even Net et Rev Revenue Sales Bre Sa Break Even en Poi Point Cost to Co to Ad Add Ac Account (sa sales, de depl ployment nt, unde underwr writing, e etc.) Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q5 Q5 Q6 Q6 Q7 Q7 Q8 Q8 Q9 Q9 Q1 Q10 Q1 Q11 Q12 Q1 Q13 Q1 Q14 Q1 Q15 Q1 Q16 Q1 20
Know Your Attrition & Growth Growth is achieved primarily through sales emphasis What’s Attrition? Volume Attrition & Growth Attrit ritio ion Net Attri t Attrition: Rate at which portfolio accounts, -10. 10.8% - 4. 4.3% 3% + + 5. 5.7% 7% = = -9.4% 4% dollar volume, or net r reven enue e decline Value E Val ue Effects 13. 13.7% 7% 5. 5.7% 7% High Attrition 104.3% 104. 100% 100% Low Attrition Attrition Factors Inter In terna nal F Fac actor tors -10. 10.8% -4. 4.3% 3% Merchant Size Vertical Diversification Merchant Concentration Exter xterna nal F Fac actor tors Retail Sales Trends Bankruptcy Rates Consumer Spending Beginni nning ng Attrit rited ed Silen ilent A Attrit rited ed Sam ame S e Store S re Sal ales es New ew End nding ng 21
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