EML Payments Ltd (ASX: EML) shares are in a trading halt this morning after it announced plans to buy Irish fintech player Prepaid Financial Services (PFS) for an upfront amount of £226 million (≈A$423 million).
The upfront price represents 17.5x PFS’s FY 2020 EBITDA (operating income) or 14x FY20’s EBITDA after significant cost savings EML’s management claims it can deliver after the deal’s implementation. According to its presentation EML hopes to pull out $6 million per year from the businesses by FY 2022.
In addition EML is on the hook to pay an additional £55 million (≈A$103 million) if PFS achieves agreed annual EBITDA targets during the three year period post-acquisition close. This outcome would place the deal on even higher EBITDA multiples.
The upfront deal price is around 7.5x sales based on PFS posting £30 million in sales over calendar 2018.
We can see then that the deal is on high price multiples, but PFS does boast gross profit margins around 60% to suggest it could be a highly profitable business if it delivers more growth.
According to EML the deal will deliver earnings per share before amortisation (EPSA) growth in the mid teens over FY 2020. Post cost savings (but before transaction costs) the EPSA growth is forecast to be more than 25%.
The group’s balance sheet will be stretched post acquisition with net debt to pro-forma EBITDA at 2.3x.
How will EML pay for it?
EML will undertake a fully underwritten share placement to institutional investors worth $67 million, with a non renounceable entitlement offer to other investors worth $183 million.
In total around 70 million new shares will be issued at $3.55 per share, which equals a 7.3% discount to the last closing price of $3.83.
The group has also renegotiated bank debt facilities up to $175 million to provide additional liquidity and working capital headroom were necessary.
EML’s shares have doubled in value since the start of 2018 and are up nearly 7x over the past 5 years so it’s no surprise to see management announce a large scrip-funded acquisition.
Only time will tell if it pays off as forecast.
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