Those of you that follow the IPO market have surely heard that WorldpayGroup (LSE: WPG)has listed on LSE.All of you who have never heard of this company probably used its services at least few times a day. Worldpay is a payment services provider for both brick-and-mortar shops and online merchants (Tesco, Asda and M&S are clients). The IPOraised2bnand, according to some press reports, pulled offthe largestIPO since 2011. Worldpay isbig. By all accounts, it is a British Champion.
Early pricing indicates that itstotal value (equity and debt) will be around 6.7bn, with market cap of5.3bn. Oh, I forgot to mention that the current valuation puts the company at (the rather boisterous level of) last years EV/EBITDA, just shy of18x.
Before we make a judgement on this seemingly ridiculous valuation, lets look at Worldpays history andbusinesses in more detail. It was started by NatWest back in the late 1980s. After NatWest and RBS merged, and after RBS almost went belly up, it was sold to a private equity (PE) consortium of Bain and Advent. It is not uncommon for banks to sell their payments arms, thoughBarclaysretainedcontrol of Barclaycard, HSBCand many other European players have sold/are selling theirpayments strategic business units (SBUs).
In general, a payments company can do a host of things, but Worldpay does three of the most important ones: it is acommercialacquirer (it moves the money, among other things), it is an acquiring processor (it handles a big chunk of the IT in a transaction) and has an online gateway (it can accept payments over the internet). On top of its global eCommerce business, Worldpayprocesses brick-and-mortar payments in the UK, with a cool 42% market share, and the US, with about2% market share.
Lets be clear, Worldpay is a fantastic business. And it generates a lot of cash, which the PE owners used tobuild a world-class payment platform and make ahost of value accretive bolt-ons.Consequently, Worldpay has a very solid footingin the traditional payments industry, which, by the way, is incredibly attractive in itself. Where else do you get sticky customers, secular growth of at least 10% p.a. (much more in eCommerce), high cash generation, and chargea fee that is only a small part of the transaction so few parties pay attention? In addition, Worldpay has positioned itself to take advantage of some key emerging trends such as the rise of the omni-channel and payments on mobile devices.
Nonetheless, the current valuation seems richas the multiple implies expected top-line growth in excess of the market and some margin expansion going forward. Or, to be more precise, the valuation reflects the promise of what Worldpay canbe but, so far, failed to achieve. TheUK business, though impressive, will struggle to be a starin face of the high market share. It could expand into Europe, but this plan is still on the drawing board. Worldpays US franchise, despite looking mediocre at present, is bound to pick up as it is geared for the omni-channel. But the magnitude of thissuccess is a bit of a guesswork. The eCommerce business should not disappoint, but it constitutes only about44% of EBITDA so it cannot by itself justify that multiple.
My guess is that in the near post-IPO future there will be a stumble, and we will be able to pick up this great business at a much better terms.
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Patrick Radecki has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.