The Tyro Payments Ltd (ASX: TYR) share price has crashed 25% over the last week following the announcement on Monday that Potentia Capital Management had advised Tyro that it does not intend to proceed with the plan to acquire Tyro.
Talks between the Tyro board and Potentia about a potential takeover have now ceased.
Potentia walked away despite being granted due diligence, as well as going through extensive and advanced negotiation of material commercial terms and draft transaction documents.
Tyro leadership 'confident' about the future
Investors may question what it means for the company going forward. Tyro chair Fiona Pak-Poy had this to say after Potentia's exit:
The board and management team have worked with commitment and in good faith to facilitate a potential change of control transaction to be put to our shareholders for consideration. We have appreciated Potentia's engagement and are disappointed that they were ultimately unable to deliver a revised offer.
While these have been long and drawn-out discussions, the refreshed leadership team under Jon Davey has continued to deliver substantial operational achievements, including launching Tyro Pro, Tyro Go and Tyro BYO (Tap to Pay on iPhone). These performance outcomes have strengthened the financial and market position of Tyro as we deliver our clear strategic roadmap.
The board and management are confident and excited about the company's outlook and the opportunities to deliver value for our customers and shareholders.
Will stronger financial performance drive Tyro shares higher?
The company doesn't necessarily need to be taken over for Tyro shares to rise – if the business can demonstrate operational growth then the market may push the valuation higher.
Tyro says its prospects remain "strong". In mid-May, it revealed that its gross profit was being upgraded to between $192 million and $194 million, while earnings before interest, tax, depreciation and amortisation (EBITDA) was upgraded to a range of $41 million to $43 million.
When Tyro announced that upgrade, it also said that the transaction value was revised downwards to between $42.25 billion to $42.75 billion, down from the previous range of $42.5 billion to $43.5 billion.
Tyro said it was targeting 'operating leverage' of 78% and an EBITDA margin of 22% (previously 21%), which was driven by a focus on margin improvement and cost reduction.
The ASX payments share also announced recently that it now offers 'tap to pay' on iPhone to accept contactless payments.
Motley Fool equity research analyst Trevor Muchedzi commented on the developments:
The withdrawal of interest from Potentia was certainly a blow to shareholders, given it comes after another potential suitor, Westpac Banking Corp (ASX: WBC), also walked away from a deal to acquire Tyro.
In addition, given the changing competitive landscape within the payment sector, the market has thus begun to question Tyro's business moat, its ability to turn profitable and generate high free cash flows.
As we can see on the chart below, the Tyro share price has dropped by 16% since the start of the year.