The Royal Bank of Scotland Group PLC on Aug. 6 agreed to sell a majority stake in its lucrative processing business, RBS WorldPay, to two private equity firms for more than $3 billion.
Advent International Corp. and Bain Capital LLC would acquire an equal stake in the business totaling 80.01%. The Edinburgh-based bank would maintain a 19.99% minority stake in the unit. The deal is pending regulatory approval, though the companies expect to close the sale by the end of the year.
The future of WorldPay has been in question for many months, after RBS agreed late last year to sell off certain assets, including the processing unit, as part of the conditions of the multibillion-dollar government bailout it received during the financial crisis. (The bank last week agreed to sell more than 300 branches to the United Kingdom division of Banco Santander as part of its efforts to slim down.)
Both Advent and Bain have had their eye on WorldPay for several years, long before the mandate to sell the business. In 2004, the companies approached RBS separately about selling WorldPay, but they never reached a deal.
The two Boston-based firms decided to team up earlier this year to compete in the formal auction process for the unit. They beat out at least 30 other bidders. James Brocklebank, a managing director of Advent in London, attributes their success to their expertise in the payments and technology arenas.
The deal “fits right within the heart of the subset of financial services that we’re interested in,” Brocklebank says.
Established in 1989, WorldPay last year processed 6.8 billion transactions totaling $388 billion. The Royal Bank of Scotland business generated an operating profit of approximately $398 million in 2009.
“It’s an extraordinary franchise,” Brocklebank says. “It’s a very, very high-quality business and one which we think there is a lot we can do given our knowledge in the space.”
Specifically, Advent and Bain see an opportunity to expand WorldPay’s e-commerce business. “It has a strong business already, but there are some ways we can grow that further,” he says. “And then there’s also the option longer term for global expansion.”
Indeed, focusing on e-commerce is a good way to drive business, says Kurt Strawhecker, managing partner of The Strawhecker Group, a management-consulting firm for the payments industry based in Omaha, Neb.
“It becomes much more of a cross-border opportunity for growth,” he says. “It’s a much broader customer base for your retailers.”
Brocklebank says the firms plan to make a significant investment in both workers and technology, but would not give an exact dollar amount. WorldPay, which is headquartered in London, employs about 2,500 workers worldwide.
Advent has made several deals in the payments industry over the past decade, including purchasing a 51% stake in Fifth Third Bancorp’s merchant-processing unit, Fifth Third Processing Solutions LLC, in July last year.
Strawhecker says he would not be surprised to see Advent fuse Fifth Third’s and RBS’s processing units at some point.
“The combination of those two certainly consolidates an awful lot of power and an awful lot of volume,” he says. “Both of these two companies have their own processing platforms. To a certain extent it’s duplicate.”
Brocklebank says there are no plans to combine the two businesses, but he stresses that the expertise of the Fifth Third team certainly helped in the RBS deal.
Bain, meanwhile, has made investments in several financial-services and technology companies, including software provider SunGard and online brokerage TD Ameritrade Holding Corp.
Publicly Held Processors May Have More Value To Gain: Analyst
The $3 billion price Advent International Corp. and Bain Capital LLC will pay for an 80% stake in RBS WorldPay, the payment-processing arm of the Royal Bank of Scotland PLC, may point to an imbalance in value between privately held and publicly held payment processors, suggests David J. Koning, a senior research analyst at Milwaukee-based Robert W. Baird & Co.
In a research note, Koning says the “estimated transaction multiple from the RBS merchant-acquiring sales implies that publicly traded merchant processors could be undervalued relative to private-market business value.”
Advent and Bain, both based in Boston, are paying approximately 10 to 11 times RBS WorldPay’s earnings before interest, taxes, depreciation and amortization, he estimates.
Of the two publicly traded RBS WorldPay competitors, Atlanta-based Global Payments Inc.’s stock is trading at about eight times its estimated 2011 EBITDA, and Princeton, N.J.-based Heartland Payment Systems Inc.’s stock is about 7.5 times its estimated EBITDA.
“If we apply similar multiples to Global Payments and Heartland, it implies the stocks are trading at a significant discount to their potential private-market business value,” Koning says.
In trading earlier this week, Global Payments’ stock was selling at $39.07 per share, which Koning says could rise to $50 to $55 if it traded at 10 to 11 times the company’s EBITDA.
Heartland’s stock, at $15.22 per share earlier this week, could increase to $22 to $25 by applying the 10 to 11 times EBITDA formula, Koning says.
“When a company is for sale in the marketplace, if it’s available with a perceived long runway ahead of it, the market will pay more for it,” Robert O. Carr, Heartland chairman and CEO, tells ISO&Agent Weekly. “Having the bank relationship and the referrals from bank, which I presume are part of the deal, makes [WorldPay] more valuable than a standalone entity that doesn’t have a referral source.”
Analyst Robert Dodd of Morgan Keegan & Co. in Memphis, Tenn., says his initial assessment is that Advent and Bain got a good price for the RBS WorldPay business.
