One of our portfolio holdings EML Payments (EML) appreciated by +15% this week. The news which triggered the move was announcement of another major acquisition, this time of fintech company Sentenial.
As discussed in our previous blog post, EML processes electronic payments for clients. This week’s Sentenial acquisition expands EML’s offering into Open Banking-enabled account-to-account payments.
In this post, we share the facts around the deal, explore what the terms “account-to-account” and “Open Banking” mean, as well as our initial thoughts on how the deal might affect our investment case.
Overview of Sentenial acquisition
Sentenial is a fintech company which has 2 business segments: Sentenial Core & Nuapay:
Sentenial Core (revenue €5m) is a white-labelled platform used by European banks to provide direct debit services to their end customers. It is a mature, low-growth business.
Nuapay (revenue €2.5m) is an Open Banking platform which processes account-to-account payments for merchants as an alternative to traditional payment methods like Visa and Mastercard
In terms of deal structure, EML paid the vendors of Sentenial €70m in upfront consideration, comprised of €39m in cash and €31m in EML scrip priced at $5.00 per share.
Moreover, should Nuapay achieve €30m in revenues by FY23 (more than 10x the revenue it earned in calendar year 2020), EML will pay the vendors a further €40m in earnouts.
At first glance, we are surprised that EML are outlaying €70-100m for a business which has not been growing at all (the 2 business segments earned combined gross profits of roughly €7.0m for 3 consecutive calendar years). The key then is to ask what is so special about Nuapay’s future prospects which could justify such an elevated purchase price.
Why makes Nuapay’s Open Banking account-to-account payments platform so exciting?
In 2018, Europe commenced rolling out the Open Banking framework. Australia followed suit in 2020.
Open Banking gives ordinary customers the ability to share their banking data (such as transaction history & account balances) with third parties such as other banks, financial institutions or fintechs.
The benefits of open banking include:
Greater transparency for consumers into the financial products they use;
Increases in financial product innovation;
Potential new revenue streams for financial institutions to partner with fintechs
What Nuapay has done is integrate Opening Banking with its account-to-account payment capabilities.
Account-to-account payments simply refers to payments made directly from one bank account to another, without the involvement of any intermediary (Visa, Mastercard etc.). This cuts out the middleman fee. To be clear, account-to-account is not new technology: in Australia we often do this when transferring funds between individuals, as it is free.
However, to date account-to-account has not been widely used between businesses & consumers (B2C) because it may take up to 3 days for the funds to clear. The Open Banking framework solves this time problem: when individuals can easily share their banking data with various third parties, B2C transaction times for account-to-account could shorten dramatically.
So this is why EML is so bullish on Nuapay: this is a business with mature account-to-account payments technology which can benefit from an emerging regulatory trend (being Open Banking). Indeed, some industry bodies suggest that account-to-account, when combined with Open Banking, could completely replace card payments in the future, with the global market for real-time payments expected to grow by 30% pa over the next 5 years.
All this means that the Sentenial deal appears to have both offensive and defensive elements for EML. On one hand, EML benefits directly from increased account-to-account adoption. On the other hand, EML could be protecting its incumbent General Purpose Reloadable cards business from potential long-term disintermediation.
Our initial conclusion
Here are our initial conclusions on the deal, subject as ever to continuous adjustment:
If Nuapay achieves its ambitious revenue targets, the overall acquisition would have been priced at just 3x revenue which would look like a complete steal. Significant valuation upside exists for EML shares!
Conversely, if Nuapay fails to capture the real-time account-to-account payments opportunity (most likely due to competitive response from powerful incumbent players), we wonder whether that signals long-term challenges for various parts of the original EML business?
At Glennon Capital, we are open minded as to the risks and rewards inherent in all our portfolio positions and stress the importance of continual monitoring of our investment thesis.
Till next week happy investing,
Michael & Kenny
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