LONDON (Reuters Breakingviews) - Gilles Grapinet is testing financial credulity in pursuit of scale. Less than two years after shelling out 2.3 billion euros for the payments arm of Switzerland’s SIX, the chief executive of Paris-listed Worldline is offering 7.8 billion euros for French rival Ingenico. The deal would catapult the company into the top five global payment processors. But shareholders risk being stuck with dour financial returns.
The 11 billion euro company is offering a mix of cash and stock that amounts to 24% more than Ingenico’s volume-weighted average share price over the past month, equivalent to an uplift of 1.5 billion euros. Annual cost savings of 220 million euros, taxed and capitalised, come close to justifying that amount. But Ingenico shares had already more than doubled over the past year, reflecting the company’s status as a perennial takeover candidate in a rapidly consolidating industry.
Strategically, the deal makes sense. While Ingenico is best known for its ubiquitous black credit card machines, the company has in recent years expanded the more valuable activity of handling online payments for businesses. These “merchant services”, where the provider pockets a recurring monthly fee plus a percentage of transactions, will account for half the combined group’s sales. Given the ongoing growth of online payments, Worldline predicts 100 million euros in combined additional revenue by 2024. Ingenico also gives its Europe-focused buyer a bigger foothold in the United States, Latin America and Asia. The enlarged group would become the fourth-biggest global payments services player by revenue.
Such breadth is impressive. Still, investors who knocked 4% off Worldline’s share price on Monday morning have their reservations. Add the cost savings to Ingenico’s estimated 2021 earnings, compiled by Refinitiv, and earnings before interest and tax would be 796 million euros. Deduct tax at Worldline’s 25% rate, and the deal yield earns a return on invested capital of just 6.6%, once Ingenico’s 1.3 billion euros of net debt is accounted for. That’s below the company’s estimated cost of capital of around 8%.
The backing of Ingenico’s board, including influential state-backed shareholder Bpifrance, means Worldline is likely to pass the required threshold of securing acceptances from at least 60% of shareholders. Grapinet may be right to bulk up. But he will need to show doubtful investors that greater scale has financial benefits as well as costs.
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