M&A in the Payments Industry: Current Trends Presenters Ray - - PowerPoint PPT Presentation

M&A in the Payments Industry: Current Trends

Presenters

Ray Sobczyk Senior Associate The Strawhecker Group Jim Zipursky Chairman & CEO Corporate Finance Associates Worldwide

Presentation Overview

• Overall M&A Market Conditions Today
• Current Trends in M&A in the Payments Industry
• What Can You Do To Enhance the Value and Marketability
• f Your Business

4

Global M&A Activity

Global deal volume (deal count) at record high in 2018 3.5% increase from 2017 to 2018 20,582 transactions Global deal value (total transaction value) increased YOY from 2017 but below peak in 2015 12.5% increase from 2017 to 2018 $3.56 trillion in 2018 Average Transaction Value Increased by 9.1% from 2017 to 2018

2018 Global M&A # of Deals 2018 Global M&A Transaction Value 5

USA M&A Activity

Deal al V Val alue ( e ($B) De Deal C Coun unt 2008 $1,062.5 7,786 2009 $629.6 6,162 2010 $930.0 7,828 2011 $1,043.0 8,924 2012 $1,235.7 9,980 2013 $1,148.0 9,427 2014 $1,687.6 11,898 2015 $2,028.4 12,837 2016 $2,129.8 11,557 2017 $1,926.5 11,175 2018 $2,059.1 9,945

USA M&A activity declined from 2017 to 2018 11.0% decline in total transactions Transaction volume lowest since 2013 However, M&A transaction value increased from 2017 to 2018 6.9% increase in total transaction value Average Transaction Value increased as well from 2017 to 2018 20.1% increase in average transaction value

6

Current M&A: Private Equity Deals

Private Equity Transactions accounted for 34%

• f North American and European Transactions

Private Equity Transactions in the USA up 6% 2017 to 2018 Private Equity Transaction value in the USA up 17% 2017 to 2018

7

M&A Transaction Multiples: EBITDA

Median North American M&A EV/EBITDA Multiples

We are seeing a “softening” in the market in terms of deal valuations 2018 median EBITDA multiples down 4% from 2017, which was the watermark for valuations Despite the decline, valuations remain at near record levels, on par with pre-Great Recessionary levels

8

M&A Transaction Multiples: PE Transactions

Transaction multiples in Private Equity transactions remain consistent, though there is softening in valuations for smaller transactions Private Equity transaction multiples are heavily influenced by availability and pricing of debt, as well as Senior Debt to EBITDA multiples/covenants

9

What continues to drive the market?

Availability of inexpensive capital and excess cash continues to drive today’s M&A market

10

What is driving this market?

The available of affordable debt continues to drive the M&A market PE Deals fit into a 3x4 “Debt Box” We have not (yet) seen the return of “silly” lending we saw in the run-up to the Great Recession The Prime Rate is effectively lower than S&P Returns, essentially leading to free money for those who borrow for acquisitions

11

Return of the IPO

In the USA, we have seen an increase in IPOs in the last few years, especially in the Tech and Financial sectors In the USA, IPOs are returning to pre-Great Recession levels Globally, IPOs are down, especially in Europe

12

Attractiveness of Payments

Efficient Economic Model

• Recurring and predictable revenue model
• Economic resiliency – manage spread
• Leverage the platform cost and expand margins
• Relatively low investment to grow
• Manageable risk

Attractive Growth Industry

• Feeds off of organic economic growth (inflation and GDP) and increased consumer usage
• Differentiation via verticals and expertise
• Expandable services – opens up to other products to merchants
• Employee talent in the marketplace
• Fragmented market – roll up strategy potential

13

$- $100 $200 $300 $400 $500 $600 Q1 Q1 201 2011 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 201 2012 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 201 2013 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 201 2014 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 201 2015 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 201 2016 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 201 2017 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 201 2018 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 201 2019

TSG Payments Index

Payments companies values have increased over two times the rate of the industry average

VS.

+23% CAGR +10% CAGR

14

$547 $547 $214 $214 TSGPX S&P 500

Where is the Opportunity in the Market?

In the U.S., the top 100 merchants make up 38% of debit/credit card volume, 3.5% of the merchant outlets, and less than 5% of the net revenue to merchant acquiring companies. Merchants outside of the top 100 make up 95% of the revenue opportunity.

15

Merchant Share in the U.S.: Top 100 Versus “All Others”

38% 62%

Dollar Volume

~$6 Trillion 3% 97%

Merchant Outlets

~ 8 Million 5% 95%

Net Revenue to Acquirers

~$25 Billion

Cost of the Transactions:

• Interchange
• Assessments and network fees
• Residuals paid to sub-ISOs
• Third Party Processing Costs

Net Revenue = Gross Revenue + Other Income – Cost of the Transactions

Other Income

• Equipment revenue
• Lease revenue
• Additional service revenue
• Monthly fees

All Other Merchants Top 100 U.S. Merchants

Key Industry Growth Metrics

Consistent growth while holding spread

Database SMB Averages – Dec. TTM

(% of volume, ex. where stated otherwise)

2015 2016 2017 2018 3-Year Change Total Volume per Active Merchant (000s) $182 $189 $196 $208 +4.5% CAGR Total Average Ticket $92 $92 $95 $98 +2.2% CAGR Net Revenue per Merchant per Month $138 $140 $142 $145 +1.7% CAGR

16

1. 1.69 69% 1. 1.73 73% 1. 1.83 83% 1. 1.86 86% 0. 0.91 91% 0. 0.89 89% 0. 0.87 87% 0. 0.84 84% 201 2015 201 2016 201 2017 201 2018

Gross

• ss Amou
• unt C

Charged t to

• the Me

Merchant

Tot Total C Cos

• st of
• f S

Sales Total al Net et R Rev even enue

2. 2.59 59% 2. 2.62 62% 2. 2.70 70% 2. 2.69 69%

Market Transaction Comparables

If a net revenue multiple was truly meaningful, the plots would be clustered in one area of the chart

Red Red Pl Plots: 2010 2010 - 2018 2018 Timef efram ame: : 2000 2000 – 2018 2018 Data ta S Set: t: 100 Tra 100 Transactions Purchas ase P e Prices es: : $300K $300K - $30B $30B

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Black = Enterprise Transactions Red = Portfolio Only Transactions Average ge ( (2011 2011-20 2018) 18): 3. 3.93 93x

• Know w
• w what y

t your b ur busine ness i is worth

• rth
• Get a valuation prior to going to market
• Don’t c

count o

• n a

a magic m multiple le

• Comparables can be misleading
• Every b

bus usiness i is uni unique

• Concentrated/Diversified
• Growth
• Attrition
• Technology
• Expense Structure
• Large/Small Merchants

Enhance the Value and Marketability of Your Business

• Know Your Business Dynamics
• Know Your Sales Model Break Even Point
• Know Your Attrition and Growth
• Know How Your Performance Compares To Your Peers
• Know Your Agreements
• Minimize Surprises to Buyer

18

Know Your Business Dynamics

A vibrant sales engine is necessary to out pace attrition

Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q5 Q5 Q6 Q6 Q7 Q7 Q8 Q8 Q9 Q9 Q1 Q10

Base Merchant Sales Engine Net Merchants

Merchant Portfolio Growth Segment Your Sales Channel Performance

• In House Vs. Sales Agents
• Two Value Components in

Merchant Portfolio: 1) Bas ase Me Merchants

Cash flows from merchants in place (attrition)

2) Sa Sale les E s Eng ngin ine

Cash flow from sales engine

Busin iness G ss Growth Sale les E s Engine Ba Base M Merc rchant Attri Attrition

19

Know Your Sales Model Break Even Point

Make sure sales investments pay off 20

Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q5 Q5 Q6 Q6 Q7 Q7 Q8 Q8 Q9 Q9 Q1 Q10 Q1 Q11 Q1 Q12 Q1 Q13 Q1 Q14 Q1 Q15 Q1 Q16

Sa Sales Bre Break Even en Poi Point Net et Rev Revenue Co Cost to to Ad Add Ac Account

(sa sales, de depl ployment nt, unde underwr writing, e etc.)

Sales Model Break Even

Know Your Attrition & Growth

Growth is achieved primarily through sales emphasis 21

Beginni nning ng Attrit rited ed Silen ilent A Attrit rited ed Sam ame S e Store S re Sal ales es New ew End nding ng

100% 100%

• 10.

10.8%

• 4.

4.3% 3% 5. 5.7% 7% 13. 13.7% 7% 104. 104.3%

Volume Attrition & Growth What’s Attrition?

Attrit ritio ion

• Rate at which portfolio accounts,

dollar volume, or net r reven enue e decline

Val Value E ue Effects

• High Attrition
• Low Attrition

Attrition Factors

In Inter terna nal F Fac actor tors

• Merchant Size
• Vertical Diversification
• Merchant Concentration

Exter xterna nal F Fac actor tors

• Retail Sales Trends
• Bankruptcy Rates
• Consumer Spending

Net Attri t Attrition:

• 10.

10.8% - 4. 4.3% 3% + + 5. 5.7% 7% = = -9.4% 4%

Know How Your Performance Compares To Your Peers

Portfolio attributes will drive variances from industry averages

0. 0.0% 0% 0. 0.5% 5% 1. 1.0% 0% 1. 1.5% 5% 2. 2.0% 0%

$0 $0 $10 100, 0,00 000 $20 200, 0,00 000 $30 300, 0,00 000 $40 400, 0,00 000 $50 500, 0,00 000 $60 600, 0,00 000 $70 700, 0,00 000 $80 800, 0,00 000 $90 900, 0,00 000

Total al N Net et Reven evenue % % Annual Me l Merc rchant Volu Volume $

My Company

Merchant Volume & Average Net Revenue

US I S Industr try Custom Industry Benchmark

• 30

30%

• 25

25%

• 20

20%

• 15

15%

• 10

10%

• 5%

5% 0% 0%

$0 $0 $10 100, 0,00 000 $20 200, 0,00 000 $30 300, 0,00 000 $40 400, 0,00 000 $50 500, 0,00 000 $60 600, 0,00 000 $70 700, 0,00 000 $80 800, 0,00 000 $90 900, 0,00 000

Volu Volume Gross A Gross Attri rition ion % Annual Me l Merc rchant Volu Volume $

Merchant Volume & Volume Gross Attrition

My Company US I S Industr try Custom Industry Benchmark

22

Questions Buyers or Investors Will Ask

1) Who Owns the Customer Relationship? 2) Which Management Members Will Remain After Sale? 3) Specifically, How Would You Grow/Develop Your Company?

(especially if capital was not an issue)

23

Questions Buyers or Investors Will Ask

24

4) Do You Have Any Proprietary Software, Technology or IP? 5) Discuss Your Attrition Rate And How It Compares To Your Peers? 6) What Keeps You Awake At Night About Your Business? 7) What Questions Do You Have For Us?

Questions?

Ray Sobczyk

• Senior Associate
• (402) 964-2617 (o)
• Ray@TheStrawGroup.com

Jim Zipursky

• Chairman & CEO
• (402) 330-2160 (o)
• jaz@cfaomaha.com