Rich Price, Strong Potential in Payments Company Buyout

March 2014
By: Quentin Webb of The New York Times

The New York Times, Monday 24 March 2014

Private equity has prospered by investing in essential modern infrastructure like cable networks.

The $3 billion-plus sale of Nets in Denmark shows that buyout firms are just as keen to buy into the world’s financial plumbing. Advent International and Bain Capital already own WorldPay, a big payments processor which Royal Bank of Scotland sold as penance for receiving state aid. Now, the two have partnered with Danish pension giant ATP to buy Nets, WorldPay’s Nordic equivalent.

An enterprise value of 17 billion Danish crowns ($3.1 billion) equates to a rich 12.4 times earnings before interest, taxes, depreciation and amortization, or Ebitda,  using figures previously reported by Thomson Reuters Loan Pricing Corporation, or an even fuller 12.8 times if a 498 million crown dividend is included. The buyers reckon the multiple is closer to 11 times adjusted Ebitda for the last 12 months, people familiar with the matter say. By conventional buyout standards that is still pretty full – albeit in line with listed American peers like Global Payments, Heartland Payment Systems, TSYS and Vantiv.

Still, there are four reasons to believe leveraged buyouts can generate decent returns in this business – hence the competitive auction for Nets. First, these assets are mainly disposals from distracted corporate owners. Private equity can’t get enough of “carve-outs” like this. Nets belonged to 186 banks, which were also its customers. That was a recipe for stasis. New owners can speed up decision-making and start focusing on profitability, much as stock exchanges did on floating.
Second, handling bank-card payments is a vital, utilitylike function. Cash flows are strong and predictable, and equity returns can be easily amplified by leverage. Net debt will be about 5.5 times Ebitda in this case.

Third, there is growth potential. Payments technology is evolving fast as notes, coins and checks fall out of favor.
Finally, buyout firms have already accumulated know-how in this sector. Advent put $561 million in cash into Vantiv in 2009; since a 2012 flotation, it has banked about $1.8 billion, before expenses, from selling stock in the United States company. Processing those payments must have made this latest deal an easier sell at the investment committee.

First Annapolis Consulting, Inc. served as advisor to Bain Capital and Advent International on their acquisition of Nets and WorldPay.