Rich Price, Strong Potential in Payments Company Buyout

Private equity has prospered 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 TRLPC, 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, who 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 upon floating.

Second, handling bank-card payments is a vital, utility-like 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 cheques fall out of favour.

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.

Quentin Webb is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.