Why Wall Street Loves Payments

Shift4 Payments dazzled the payments industry and Wall Street with its June initial public offering. What do recent processor IPOs say about the prospects for payments companies?

No investment in the stock market is a sure winner, but payments investments often prove to be better than others.

On June 4, underwriters for merchant acquirer Shift4 Payments Inc. priced the company’s initial public offering at $23 per share, above their $19-to-$21 target just days before. The next day, Shift4’s shares opened on the New York Stock Exchange at $33.10—an instant 44% gain. Recently, Allentown, Pa.-based Shift4’s shares have been trading in the $50 range.

Not bad, considering that Shift4, which claims about 200,000 merchants generating more than $200 billion in annualized payment volume, gets more than half its volume from the hospitality industry. After all, its IPO came during the midst of the Covid-19 pandemic, which forced the closure of many restaurants and sent hotel reservations plummeting.

Palo Alto, Calif.-based business-to-business payments provider Bill.com Holdings Inc. last year had expected to get $16 to $18 per share from its planned IPO, then upped the target to $19 to $21. But with underwriters sensing strong investor demand, the company priced its Dec. 13 IPO of 9.82 million shares at $22 per share. The next morning, trading in Bill.com’s new stock opened at $37.25 on the New York Stock Exchange, 69% above the IPO price. It’s been mostly upward since then. In mid-August, the stock was trading in the $93 range.

“Wall Street loves payments,” says consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures. “Payments remain, nationally and globally, healthy [for] secular growth long term.”

‘Investor Appetite’

Shift4 and Bill.com have joined a club of about 40 publicly traded payments companies that, in addition to the four U.S.-based global card networks, includes merchant acquirers, online and specialty processors, PayPal, and all manner of tech suppliers.

IPOs let a company’s funders cash out on their investments and potentially enable the firm to pay down debt, make acquisitions, and fund product development. But not every IPO is a home run. Striking out is a clear possibility, and sometimes the offering is simply the financial equivalent of a single or double.

The small acquirer Net Element Inc. had an IPO in 2012 but in May announced that it would explore “strategic alternatives” because “the public markets do not appropriately recognize the value of our business.” The company recently struck a deal to merge with an electric-auto firm interested in its public listing, not its processing business, which Net Element is required to divest.

Merchant acquirer EVO Payments Inc. got off to a strong start with its May 2018 IPO, pricing it at $16 per share and opening the next day at $20.05. The stock, which lately has been trading in the $27 range, largely outpaced the major market indexes in 2019. But it mostly trailed them in the recovery since the market tanked in February and March as governmental stay-at-home orders and related measures to control Covid-19 slammed the brakes on the economy. In late summer, however, EVO made strong gains, outpacing the S&P 500 and the Dow Jones Industrial Average.

As a group, the publicly traded payments companies have done better than the broader market for years, according to merchant-acquiring consultancy The Strawhecker Group.

Starting in the first quarter of 2011, a $100 investment in a basket of more than 25 payments stocks TSG tracks would have been worth $670 by 2020’s second quarter, representing a 22% compounded annual growth rate. That compares with $234 for the equivalent of a $100 investment in the S&P 500 over the same period, which had a compounded growth rate of 10%.

“You look at a lot of the payments stocks, even some of the legacy companies … their stocks have been holding up fairly well,” says Jared Drieling, senior director of consulting and market intelligence at Omaha, Neb.-based TSG.

American Express Co. joined the New York Stock Exchange in 1977, some 127 years after its founding and about 20 years after it got into the credit card business. A $1,000 investment in AmEx’s IPO would have been worth more than $446,000 near the end of 2019, according to the financial news and analysis service The Motley Fool. That return doesn’t even include the effects of reinvested dividends.

Spawned by banks, Mastercard Inc. joined AmEx as a global, publicly traded payment firm in 2006 with its seminal IPO—the first for a bank card network. The next year, Discover Financial Services, whose namesake card was founded in 1985 by Sears, Roebuck & Co., finally was spun off as an independent, public company by investment firm Morgan Stanley.

Visa Inc. followed Mastercard in 2008 with a record-breaking, $17.9 billion IPO. As of late July, Visa’s market capitalization was about $434 billion—by far the biggest in the payments industry, according to Yahoo! Finance. Mastercard was No. 2 at $311 billion.

With the Federal Reserve and Congress trying to jump-start the economy, some observers believe now could be a good time for processors to tap the public markets, especially if they offer contactless and online payment options.

“The Fed is flooding the market with liquidity,” says Grover. “It’s been, maybe counter-intuitively, a healthy environment for payment IPOs.”

Adds San Francisco-based analyst Joseph Vafi, managing director for equity research at Canaccord Genuity: “The investor appetite is pretty darn good right now. I think the Covid pandemic has shifted the focus to electronic payments.”

‘A Lot of Cash’

Analysts agree, however, that investors are looking more at the potential long-term returns from payments companies rather than whether they’re capitalizing on short-term opportunities the pandemic creates.

Shift4 had been seriously prepping for an IPO since 2018, and actually had its eyes on eventually going public since it was founded in 1999 as the independent sales organization United Bank Card, according to founder and chief executive Jared Isaacman.

“The IPO is a journey, it takes a lot of time,” he says.

Shift4 had hoped to ring the bell at the New York Stock Exchange on April 8, but the Covid-19 breakout delayed the “road show”—visits by underwriters and company executives to sell the prospective IPO to potential investors—by two months. “We were a week away from the road show when the Covid-19 thing came along,” says Isaacman, noting the tour was compressed into just a few days in the first week of June.

A Shift4 prospectus estimated the IPO, with 15 million shares to be sold and potentially another 2.25 million if demand warranted, would raise $315 million to $364 million in net proceeds. But the offering was oversubscribed and ultimately generated $497 million in net proceeds.

“There was just a lot of demand,” says Isaacman.

Under Shift4’s new holding-company structure, Isaacman retains the majority economic interest as well as the majority of the voting power. The private-equity firm Searchlight Capital holds a substantial interest, while the public shareholders have about a 22% economic interest but only a single-digit share of the voting stock.

The IPO enabled Shift4 to pay down more than $285 million in debt “and put north of $200 million on the balance sheet,” says Isaacman.

“We achieved exactly what our objectives were, which were to substantially de-lever, and we put a lot of cash on the balance sheet for good times or bad,” he says.

Flashy Advertising

Isaacman won’t say what Shift4 will do with the IPO funds, such as buy another company. Regarding potential acquisitions, however, “We try and keep a decent pipeline,” he says.

Isaacman attributes the strong IPO in part to investors noticing Shift4 was gaining share in the restaurant industry, even though many establishments were getting hammered because so few people could eat inside in the spring and early summer (“Cooking Up a Comeback,” May).

“We’ve always taken share from the competition,” he says. “Our business can’t just be measured in a static basis. We’re growing because we’re taking so much share.” He adds that, “roughly a third of the restaurants and hotels in the country” use at least one Shift4 product, though not all take “our full stack” of software and payment services.

Another factor: Recent mergers have removed some of leading payment processors from the public markets (“Let’s Make a Deal,” May 2019). First Data Corp. is now part of Fiserv Inc.; Worldpay Inc., formerly Vantiv, is now part of FIS (Fidelity National Information Services Inc.); and TSYS (Total System Services Inc.) is now owned by Global Payments Inc.

“Right now, there is definitely a scarcity of payments assets,” Isaacman says.

Analysts say investors gave points to Shift4’s suite of software offerings and marketing. “Their technology platform allows disparate systems to connect in,” says Gary Prestopino, managing director at Chicago-based Barrington Research Associates Inc. “That gets investors excited.”

TSG’s Drieling says Shift4’s integrated offerings enable the company to capitalize quickly on new market trends. He points to the huge spike in restaurants’ demands for online-ordering and related capabilities in response to the closure of inside dining.

“Integrated payments really give you that ability to pivot and focus on channels that are [growing],” he says. “A lot of those merchants are looking to pivot, and quickly.”

The acquiring industry isn’t noted for flashy advertising, but Drieling says Square Inc. and Shift4 have stood out. Shift4 has advertised on the reality TV show Bar Rescue, and in July it was designated the “Official Credit Card Processing Company of the Las Vegas Raiders” and the Raiders’ Allegiant Stadium, where all payment transactions will be processed on Shift4 technology.

“They’ve done a tremendous job around marketing,” says Drieling.

Shift4 pioneered the tactic of giving away point-of-sale terminals as a way of booking new accounts, a controversial move copied by some of its competitors. Lately, it’s updated that move by offering free QR-code payment technology or free online-ordering, takeout, and delivery systems for restaurants. Isaacman insists any short-term revenue hit through the giveaways is more than compensated for by the revenue the new merchants generate over time.

“We don’t need to make money off of the individual service as long as we’re winning the long-term relationship,” he says.

IPO and related activity continued throughout the summer. In early August, Atlanta-based payments provider Paya Inc., which is owned by private-equity firm GTCR LLC, announced a planned merger with a so-called blank-check company with a public listing. The combined entity will trade on the Nasdaq.

And while it’s not a payments pure play, e-commerce services provider BigCommerce Holdings Inc. had an IPO in early August and saw its share price pop 201% on its first day of trading.

With Shift4 and Paya having partly filled the void of publicly traded payments companies created by last year’s mergers, who might be next? Ant Group, the payments arm of China’s Alibaba e-commerce behemoth, reportedly is looking at a public offering with listings on exchanges in both Shanghai and Hong Kong. The company’s estimated valuation could be upwards of $200 billion, Yahoo! Finance reported.

The Wall Street Journal reported in late July that point-of-sale credit provider Affirm Inc. was exploring an IPO, and Reuters said card-issuing platform Marqeta Inc. was looking to hire investment bankers ahead of a possible IPO.

Although it hasn’t made noises about an IPO, talk never ceases about Stripe Inc., whose value analysts estimated at $35 billion a year ago. Founded by brothers Patrick and John Collison, San Francisco-based Stripe started out in e-commerce services for merchants but also has moved into the physical payments world.

Consultant Grover says Stripe could go public “tomorrow morning.”

“At some point, the venture-capital firms that fund them, and the Collisons, will want to get liquid and will want to go public,” he says.

But today’s strong IPO market has no guarantee of longevity.

“The private-finance markets are still pretty robust,” leaving alternatives to IPOs on the table, analyst Vafi says. And if Covid-19 keeps re-surging, as it was doing in mid-summer, he says the result could be “headwinds in the economy. The public markets may not be as strong in a year.”

Thus, today’s lesson may be to get in while the gettin’s good.

 

When a Public Listing Is Your Most Valuable Asset

Sometimes a company’s core business proves to be less desirable than its listing on a stock exchange.

Merchant processor Net Element Inc. found that out in June when it signed a letter of intent to merge with Mullen Technologies Inc., a privately held startup that plans to sell Chinese electric sports cars in the U.S. The pending deal requires Net Element to divest its payment-processing business.

In early May, Net Element announced plans to “explore strategic alternatives … to unlock shareholder value.” The company claimed “it appears that the public markets do not appropriately recognize the value of our business.”

Net Element did not state a value for the pending deal, but its stock rocketed June 15, the day of the announcement, to close at $6.90 per share, up 50% from the previous $4.60 close. For much of the previous year, the stock had been trading in the $3 range or even less.

Share prices rose and then fell during the summer, closing in the $9.50 range in mid-August. Yahoo! Finance pegged Net Element’s market capitalization at $35.7 million at that time compared with $13.2 million as of Dec. 31.

The so-called “reverse triangular merger” is an all-stock deal that will enable Brea, Calif.-based Mullen to go public without having an initial public offering. Mullen will own 85% of the surviving company, install a management team led by founder and CEO David Michery, and get control of Net Element’s listing on the Nasdaq Global Select Market. Net Element’s shareholders will own 15%.

As of mid-August, no sale of the processing business had been announced. A Net Element spokesperson did not respond to Digital Transactions’ inquiries.

Besides its North American merchant-processing business, North Miami Beach, Fla.-based Net Element has an international operation based in Russia. Russia generated $3.2 million of the company’s $65 million in total revenues for 2019, says Lisa R. Thompson, a senior equity analyst who follows Net Element at Chicago-based Zacks Small-Cap Research.

The North American segment processed $3.2 billion in volume last year, up 10.3% from 2018. The international segment posted $425 million in volume, down 2.1%.

The post-merger company will be known as Mullen Technologies Inc., and it won’t have anything to do with payments. Mullen, which owns eight car dealerships in California and one in Arizona, in addition to the CarHub online auto marketplace and other businesses, plans to import the Chinese-made, electric-powered Dragonfly K50 luxury sports car to the U.S. next year. Mullen also is developing electric car batteries, and even plans to assemble electric vehicles.

While IPOs get more headlines, reverse mergers are another way a company can tap the public equity markets. For Mullen, “it gets them out the door quicker, costs less, pays bankers less,” says Thompson.

The letter of intent also requires Net Element to raise $10 million in a private placement. Mullen shareholders could acquire another 5% of the post-merger company if it generates more than $100 million in revenue over 24 months after closing.