Not All Acquisitions Are Created Equal

Author: Ron Shamgar

In general, the market and investors like companies that make acquisitions. Acquisitions that add scale and capabilities and are done at attractive valuations can be very accretive to a company. There are some companies that are definitely more acquisitive than others. Whether a company makes a large or small deal, some acquisitions can be more strategically beneficial and transformational than others. With this in mind, we discuss three companies we own that made very strategic deals last week.

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EML Payments (EML.ASX) announced the acquisition of Sentenial and its subsidiary Nuapay for $110m plus a $60m earn out. The deal, funded by partial cash and debt, is not huge in size for EML but significant and transformative as it enables EML to enter the fast-growing open banking sector. Open banking is taking over the payments world; driven by regulatory changes and customer demand. It allows customers and merchants to make instantaneous account to account payments, thereby reducing costs to merchants and fraud. For consumers it is a more convenient way to pay than using a card.

Since open banking is bypassing the card scheme operators like Visa and MasterCard, these payment giants are concerned as some estimates predict that 30% of all future payment revenues will go to the open banking sector. Visa, for example, agreed to acquire leading open banking fintech Plaid in early 2020 for $5.3bn, double their then most recent private valuation. The acquisition was blocked by the competition regulators in January this year. Just three months later Plaid is now valued at $13bn.

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Source: EML company filings

For EML, the Sentenial deal adds a key growth vertical that will help them not only disrupt and stay relevant in the payment world, but also add $23m in EBITDA three years from now. We estimate that Sentenial alone adds over $2 per share of value to EML and our valuation increases to over $8.00 as a result. EML is currently a holding in our Australia All Cap portfolio.

Spirit Technology Solutions (ST1.ASX) acquired telco business Nexgen for $50m last week. The deal adds $36m of revenues and $7.5m of EBITDA. More importantly, 80% of revenues are recurring and are contracted for an average of 4.5 years. The combined group will double its SME customer base to 10,000. We see the deal as transformative for ST1 not just because it adds scale and profit. Nexgen brings with it a sales team of 100+ personnel that can now cross sell ST1’s other services to its wide and freshly expanded customer base, offering products for cyber security and data. Following the deal we now estimate ST1 is has run rate revenue of $150m and approximately $20m of EITDA. Our valuation is 55 cents. ST1 is currently a holding in our Australia All Cap portfolio.

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Source: ST1 company filings

SG Fleet (SGF.ASX) announced the acquisition of one of its largest competitors in Australia, Leaseplan. The deal is transformative as it creates a fleet management and car leasing group with 250,000 vehicles under management. Management is estimating $20m worth of cost synergies over the first three years which in turn will be 20% cash EPS accretive for shareholders. The deal will see the combined group become by far the largest player in the local Australian and New Zealand market, managing approximately double the number of vehicles of to their nearest competitor. 

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Source: SGF company filings

By adding Leaseplan, SGF improves its recurring revenue profile to 70% of group sales. We believe this will command a higher valuation multiple from investors over time. We value SGF at $3.50 and we own the stock in the Small Cap Income portfolio.

Source: SGF company filings

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Disclaimer: All three stocks are held in TAMIM portfolios.