French company Ingenico is a global leader in payment systems. Its external growth strategy the core of the groups DNA is both a source of risk and opportunity.
The group was founded in 1980 and has developed itself with great fanfare through a series of acquisitions (the companys Wikipedia page shows a synthetic history of this hunting board).
Truly anchored in the groups DNA, this external growth strategy is as usual a source of risk and opportunity at the same time.
The two activities of Ingenico are the management of card terminals (1,6 billion Euros in revenue, 10% annualized growth since 2012) and the management of online transactions (728 million in revenue in 2016, 30% annualized growth since 2012).
Almost in a duopoly with the American company Verifone
, the group holds more than 40% of the global market in the activity of managing terminals. The entry barriers are high and the technology demanding because it involves the direction of millions of flows issued via several networks (Visa, MasterCard, PayPal, etc.) towards the systems of national banks.
Although mature, this activity rests thus on a competitive advantage (the network effect) and still harbors a considerable growth potential, a fortiori in emerging markets where governments push civilians and companies to abandon cash and use payment methods that are traceable.
However, Ingenicos most recent acquisitions aim to strengthen its presence in its second sector of activity: online transactions. This sector has a stronger growth and the French group has 5% of the global market share here.
The perspectives here are promising, but the competition is fierce and a number of disruptive players tries to get their foot in the door from players like Stripe or PayPal to more traditional rivals such as the British Worldpay or the German Wirecard.
American technology giants like Apple and Google have also shown their interest and continue to explore different strategies to get through.
Ingenico focuses in particular on the market of seamless payments, this means fully automated online payments, like Uber has for example, where the client doesnt need cash nor card to pay the driver.
The industry is still largely fragmented. The smaller competitors are natural acquisition targets because the only way to prosper here is to reach a scale thats large enough to dilute the transaction cost as much as possible in order to generate margins.
The small ones thus need to hang on and hold on tightly (especially thanks to the merciful financial markets) while the bigger ones have to acquire wisely meaning the right technology at the right time and at the right price.
Ingenico has made several dozens of acquisitions the past few years
. Among the more remarkable ones was the Dutch firm Global Collect in 2014 for 820 million Euros (less than three times the turnover) and the Swedish Bambora in July 2017 for 1,5 billion Euros (almost 8 times the turnover).
Theres a consolidation wave going on by the way in the top of the industry: Worldpay
has been acquired by Vanity
for almost six times the turnover (after being courted by Ingenico); the Danish company Nets has been acquired by private equity firm Hellman & Friedman for around four times the turnover; and according to certain rumours, the other French company Worldline
(subsidiary of Atos
) would have shown its devotion to
Ingenico despite the latter being bigger.
So far, its external growth strategy has worked well for Ingenico: the group has made its successive acquisitions profitable and multiplied its turnover by almost four in ten years time (from 568 million in 2007 to almost 2,5 billion expected in 2017).
The profitability has improved and the cash profit (free cash-flow) before acquisitions has multiplied by five between 2007 and 2016 (from 50 million to 240 million Euros).
The balance sheet is of reasonably good quality with 2 billion of high-quality liquid assets (cash and receivables) and 2 billion of intangible fixed assets (mostly the difference between inherited acquisitions and the various repurchases of companies) against around 3,5 billion of proforma liabilities (estimation by the author while waiting for the publication of the earnings), almost 2 billion of which is long-term debt following the acquisition of Bambora.
At 92 Euros per share and on a diluted base of 64 million shares, Ingenico is currently valued on the exchange at 6 billion, or 25 times its cash profit in 2016 a return on earnings of 4% for the new shareholder.
This valuation is reasonable for a company thats growing heavily
but risky if by chance this growth struggles to materialize.
The bet in this respect is very clear: if Ingenico integrates Global Collect and Bambora well and succeeds its future acquisitions, the current valuation is justified and should follow the same upward trajectory as the past ten years.
Therefore the financing conditions should stay favorable (the current conjuncture is without a doubt ideal) and the acquisitions need to take place at reasonable multiples, in order to be able to produce a good yield over time. This is a considerable challenge because the buyer competition is (as weve seen) plenty and ambitious.
These optimistic perspectives would be challenged if the group were taken over by better-capitalized competitors, missed a technological turn, or had trouble to integrate a big, transformational acquisition.
If by chance such a failure occurred, the best option for Ingenico would be to sell itself (like Gemalto did) undoubtedly for a multiple of its turnover thats at least equal to its current valuation (less than three times the turnover).
Except for a major earthquake in the industry (like a complete abandonment of payment cards), the risk seems thus limited, and the opportunity is clearly identified for investors who are truly focused on the long-term. Unless a strategic buyer takes advantage of the current, exceptionally mild, financing conditions to make an irresistible offer in the short-term
Ingenico is a position in the 4-Traders European portfolio