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(Bloomberg Opinion) -- Mashing together the plumbing of the payments industry has provided a steady stream of deals for bankers. With Nexi SpA inking its agreement to buy Nets S/A over the weekend, the European sector now looks to be coalescing around two players, one French and one Italian. But this is probably only the end of the beginning for consolidation.Nexi’s combination with private-equity-owned Nets, plus its recent deal to buy SIA in Italy, will create a company with an enlarged market value implicitly north of 20 billion euros ($24 billion). French rival Worldline SA, which agreed to buy domestic peer Ingenico SA earlier this year, is likewise worth around 20 billion euros. Lots of smaller deals by these various companies have created what now appears to be a neatly concentrated listed sector. But that doesn’t mean the dealmaking is over.The U.K. has been oddly left out of the action despite London being Europe’s financial center. The emergence of sizeable European payments firms has arguably been a missed opportunity for the likes of Barclays Plc, Lloyds Banking Group Plc and Natwest Group Plc, the original owner of Worldpay, now part of Fidelity National Information Services Inc. Worldpay could have chosen to be a European consolidator, but instead pivoted to the U.S. and global e-commerce, and was soon gobbled up.Barclays’s payments assets could potentially be a platform on which to build. But for now, London’s interest in this story is mainly about the teams at private equity firms Advent International Plc, Bain Capital and Hellman & Friedman that have led the growth of Nexi and Nets. Buyout firms will still own a significant minority holding in Nexi after its recent transactions and they have agreed to lengthy lockups.For all of the activity, the European payment market remains fragmented. The major U.K., French and Spanish banks sit on platforms that would make logical disposal candidates at the right price. It’s not easy for them to commit capital to these operations and lead expansion by acquisition.So there’s probably no shortage of available transactions to fuel continued expansion at Nexi and Worldline — or even a fresh roll-up vehicle. Nexi’s pro-forma leverage, while high on a snapshot basis at over three times Ebitda, is expected to fall to 2-2.5 times Ebitda in 2022. That suggests its main constraint to doing more deals will be the demands on management rather than financial firepower.The valuations available for selling payments assets continue to advance. Nexi and Fidelity National have gone from trading at mid-teens multiples of forecast Ebitda to almost 20 times in the last year.Vendors will be increasingly wary of risking looking like fools for selling assets at prices that look too cheap later. But the temptation to cash in at these levels will remain strong. The payments M&A merry-go-round spinning for a while yet.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- It looked like proof that private equity had more money than sense — a pricey $6 billion consortium deal for Nordic payments group Nets A/S led by Hellman & Friedman in late 2017. The transaction may yet prove the naysayers wrong.At the time, Hellman & Friedman Chief Executive Officer Patrick Healy told the Financial Times the buyout firm had paid more than it wanted to, but “that’s what was required to get the deal done.” Three years on and Italian payments peer Nexi SpA is in talks to buy Nets in exchange for a stake in the enlarged company, taking it public for the second time in five years.Nexi says it would value Nets on an equivalent multiple of 2020 expected Ebitda. Its own multiple was nearly 18 times as of Friday but has been higher in recent months. On that basis, Nets would be worth around 7.2 billion euros ($8.4 billion) assuming its roughly 400 million euros of Ebitda last year has held firm. Deduct net debt and the equity is then worth around 5.4 billion euros.The Hellman & Friedman consortium wouldn’t get all that value. Nets bought another payments group, Concardis, for stock in 2019. Assume that diluted the original private equity owners to an 80% holding and their share of the value from a Nexi tie-up would be worth around 4.3 billion euros. Still, the equity in the original buyout was just 2.7 billion euros, a Nets bondholder presentation suggests. If no other money has gone in or out since, the annualized returns would be running in the high-teens percent.Those gains partly reflect the fact that Hellman & Friedman is selling Nets on a higher multiple of profit than it originally paid. No buyout baron should ever bet on achieving that. Even so, the reality is that listed payments groups trade on stronger profit multiples now than they did three years ago. Leverage amplifies the effect.Did Hellman & Friedman add any value itself? Its overhaul of the business isn’t immediately apparent in revenue and Ebitda numbers that look barely changed from 2017. But the private equity owners added capabilities Nets lacked, in mobile payments and analytics, and expanded its footprint with the acquisition in Germany. A subscale division was sold to Mastercard Inc. Without this re-jigging, Nets would have arguably been a less desirable partner, too narrow in its services and its geographical presence.The final returns will emerge over time whenever the consortium chooses to sell down. The realization of the touted financial benefits of a Nexi merger — an unitemized 150 million euros annually — would provide some extra uplift. Public-market investors in Nets will be wondering if they shouldn’t have sold. But it didn’t feel that way at the time, and it’s not clear they would have endorsed the strategy and leverage that private equity brought to bear here. As things stand, Healy looks set to claim vindication.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- The pandemic has prompted governments to take a more active role in managing their economies. Politicians are giving out generous loan guarantees and subsidizing wages to reduce the risk of a wave of bankruptcies and mass unemployment. The next step is taking over companies directly. After a spree of recent acquisitions — from payment systems to airlines — Italy appears to be headed in this direction already.It’s a troubling prospect. For much of the past three decades, Italy had shifted decisively away from the command economy model that dominated the country after the late 1930s. Under Mario Draghi’s stewardship, Italy’s Treasury embarked on one of the largest privatization programs in western Europe, encompassing everything from banks to utilities. Public spending still accounted for 48.7% of gross domestic product last year. But from left to right successive governments tried to introduce structural reforms and open up to private investment.The present coalition government of the left-of-center Democratic Party and the populist Five Star Movement has put a stop to all that. Last week it unveiled the new board of Alitalia, the chronically unprofitable airline, and will spend 3 billion euros ($3.5 billion) nationalizing the company. Meanwhile, Cassa Depositi e Prestiti SpA, Itay’s state lender, has acquired a 7.3% stake in Euronext as part of the latter’s takeover of exchange operator Borsa Italiana. Similarly, CDP has become the top investor of Nexi SpA following the digital-payment company’s purchase of SIA SpA. CDP is also involved in the negotiations to strip the billionaire Benetton family of its controlling share in motorway operator Autostrade per l’Italia SpA, after the 2018 collapse of Genoa’s Morandi Bridge. The state lender is also investing in a string of smaller companies, and stewarding efforts to create a single Italian broadband network.This sharp change in direction is only partly a response to the pandemic. Prime Minister Giuseppe Conte’s economic adviser is University College professor Mariana Mazzucato, a long-time supporter of government intervention. Five Star has advocated the nationalization of banks, utilities and other public infrastructure since its creation in 2009. The Democrats have followed suit, abandoning the reformist instincts of former party leader Matteo Renzi.Italy’s record on state intervention is mixed, at best. After the Great Depression, the Fascist regime created the Institute for Industrial Reconstruction, which dominated the post-war economy. Some economists credit IRI with prompting Italy’s remarkable catchup during the 1950s and 1960s — while others believe this was a natural consequence of postwar reconstruction and the transition from an agricultural economy. In the 1980s, many state-owned companies became bastions of inefficiency and privilege, leading to privatization.Rome hopes its new round of nationalizations, allied with new EU pandemic funds, will spur public investment after a decade of contraction. It believes having a long-term investor like the state or CDP will force companies to pursue broader objectives such as fighting climate change, rather than simply rewarding shareholders.Unfortunately, pursuing efficiency while keeping a government happy is often incompatible. For example, the state is almost certain to resist calls to cut jobs at Alitalia, even if that’s needed for an effective turnaround. If Italy’s motorway network is nationalized, the government and CDP will find it hard to increase tolls, an important source of funds for maintenance work. More generally, foreign investors may get the impression that they need to team up with a state-controlled entity if they’re to pour money into Italy. That’s not an attractive vision.Neither is the lack of independence in running these enterprises. CDP is struggling to keep its distance from Italy’s politicians as they demand its involvement in more and more companies. The coalition has stuffed loyalists onto the boards of state-owned entities such as defense group Leonardo SpA and oil giant ENI SpA.Italy isn’t alone in the shift towards big government. France has never really moved away from dirigisme. But even Britain’s Conservatives, the champions of free markets, are abandoning Thatcherism to hold onto the support of working class Brexit voters in the north of England. Running an ever-growing state with ever-growing public debt will be an enormous challenge after the pandemic. One hopes politicians realize the implications.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.