Those of you that follow the IPO market have surely heard that Worldpay Group (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 IPO raised £2bn and, according to some press reports, pulled off the largest IPO since 2011. Worldpay is big. By all accounts, it is a ‘British Champion’.
Early pricing indicates that its total value (equity and debt) will be around £6.7bn, with market cap of £5.3bn. Oh, I forgot to mention that the current valuation puts the company at (the rather boisterous level of) last year’s EV/EBITDA, just shy of 18x.
Before we make a judgement on this seemingly ridiculous valuation, let’s look at Worldpay’s history and businesses 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, though Barclays retained control of Barclaycard, HSBC and many other European players have sold/are selling their payments 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 a commercial acquirer (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, Worldpay processes brick-and-mortar payments in the UK, with a cool 42% market share, and the US, with about 2% market share.
Let’s be clear, Worldpay is a fantastic business. And it generates a lot of cash, which the PE owners used to build a world-class payment platform and make a host of value accretive ‘bolt-ons’. Consequently, Worldpay has a very solid footing in 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 charge a 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 rich as 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 can be but, so far, failed to achieve. The UK business, though impressive, will struggle to be a star in face of the high market share. It could expand into Europe, but this plan is still on the drawing board. Worldpay’s US franchise, despite looking mediocre at present, is bound to pick up as it is geared for the ‘omni-channel’. But the magnitude of this success is a bit of a guesswork. The eCommerce business should not disappoint, but it constitutes only about 44% 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.
