Daily BriefsTMT/Internet

Brief TMT & Internet: Shift4 Payments IPO Valuation Analysis and more

In this briefing:

  1. Shift4 Payments IPO Valuation Analysis
  2. How to Play the Globalization of E-Commerce Live Streaming? Buy Alibaba
  3. Shift4 Payments IPO: Needs More Merchants and Higher Fees to Shift2 Profitability
  4. Dada Nexus Announces US$15-17 Per ADS Range, Our Sum-Of-Parts Approach Yields US$14.60 Target
  5. MásMóvil: Private Equity Is Back

1. Shift4 Payments IPO Valuation Analysis

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The bankers provided the IPO price range for Shift4 Payments (FOUR US) IPO which is expected to be priced between $19 and $21 per share. 

Shift4 Payments is one of the leaders in the U.S. in providing integrated payment processing, delivering numerous solutions and value-added services. Companies such as Shift4 Payments that are involved in the payments for online/mobile payments infrastructure are benefiting from the COVID-19 pandemic as customers make more payments with contactless payments and online banking services.

In our base case valuation, we used the gross revenue estimate of $1.1 billion in 2021 and used a P/S multiple of 2.2x, which is at a 40% discount to the valuation multiple of Evo Payments in 2021. We believe such discounted multiple is appropriate for Shift4 Payments due to its lower gross and operating margins versus Evo Payments, despite the former company’s higher gross revenue growth rate. 

Despite lower P/S multiple of 2.2x, this suggests an implied market cap of $2.4 billion or $29.40 per share, which represents a 40% upside to the high end of the IPO price range of $21 per share. Given the solid upside, we would take this IPO deal.

We also believe that this company could be a nice take out candidate as the global payment industry continues to consolidate rapidly. 

2. How to Play the Globalization of E-Commerce Live Streaming? Buy Alibaba

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In China, e-commerce live streaming has already been validated as many companies such as Taobao, JD, and Pinduoduo have seen great success leveraging the channel as a means to reach increasingly digital consumers. 

Alibaba is now looking to take this model global through its subsidiary AliExpress. Last week, the Company launched an initiative called “AliExpress Connect” seeking to onboard over 1 million influencers and KOLs over the next three years to help sell its products internationally under its model of “shoppertainment” and e-commerce live streaming.

We see this as a major catalyst that can potentially drive faster growth in the Company’s international business, while simultaneously benefitting its other e-commerce live streaming peers by expanding the total addressable market.

3. Shift4 Payments IPO: Needs More Merchants and Higher Fees to Shift2 Profitability

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  • Shift4 Payments (FOUR US), a leading US-based independent provider of integrated payment processing and technology solutions, has filed for an IPO in the US. The company has not yet issued details of the IPO such as the price per share or the number of shares, however, it has a placeholder indication to raise around US$100m and could raise as much as US$300m.
  • The company managed to clock double-digit growth in revenues in 2019 and has generated operating profits during a few quarters over the past two years.
  • Our profitability analysis on the company indicates that the company gross margins are declining as it continues to incur heavily on direct costs such as network fees for its large segment, Payment-based solutions.
  • Shift4’s operating expenses below its gross margin are less volatile to change in revenues implying that these expenses are more fixed in nature. We believe, the company should continue to grow its revenues at a higher rate than historical growth rates in order to absorb all of its expenses and generate operating profits.
  • In this insight, we take a look at the company’s business model, its financials and the company’s growth prospect. In a follow-up insight, we aim to take a look at the company’s valuation in detail.

4. Dada Nexus Announces US$15-17 Per ADS Range, Our Sum-Of-Parts Approach Yields US$14.60 Target

On Monday in the US Dada Nexus (DADA US) issued an updated prospectus that features a price range of US$15 to US$17 per ADS. Assuming US$16 per ADS and no greenshoe option, the offering would value Dada Nexus at US$3.5 bn and would generate US$264 mn in gross proceeds. Media reports from late May suggested the company would raise as much as US$500 mn in the IPO, so today’s updated prospectus suggests Dada has pared back its expectations significantly. 

Although it has reduced its losses in recent years, Dada Nexus is unprofitable and in our view unlikely to turn profitable soon. As the company is made up of two distinct business lines — a local delivery service and an online retail marketplace — we believe a sum-of-parts approach that focuses on the top of the P&L is an appropriate approach to valuing this growing company. 

Due to a lack of profitability, we employ EV/Revenue multiples using rolling 12-month revenue for the period ending March 2020. For Dada’s retail platform, we apply EV/Revenue multiples from the leading Chinese B2C platforms. For its crowdsourced delivery business, we apply a much lower multiple from China’s express sector. This approach yields a fair value target of US$14.60, about 3% below the lower-end of the price range announced today. 

We also consider the limitations of our sum-of-parts approach, and which factors could generate a higher (or lower) fair value estimate. Ultimately, we conclude that employing EV/Revenue multiples of larger, more successful Chinese eCommerce companies probably flatters Dada Nexus. As we point out in our recent note Setting up Reference Points for Dada Nexus’ ‘Dada Now’ Local Delivery Business, Dada Nexus faces potential competitive threats from large, well-funded rivals. 

We will continue to monitor the progress of Dada Nexus’ IPO over the next several weeks. Interested readers can find a link to the updated prospectus at the end of this report. 

5. MásMóvil: Private Equity Is Back

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A private equity consortium (Lorca) formed by Cinven, Providence and KKR has launched a friendly voluntary takeover offer for Masmovil Ibercom (MAS SM) at a price of EUR 22.5 per share for the whole share capital.

  • Values MasMóvil at EUR 2,963.57 mn.
  • Total EV of nearly EUR 5 bn
  • It is a 20.2% premium to the closing price on Friday, 29 May, the last trading session prior to the bid.
  • The bidder has financial guarantees from Barclays, BNP Paribas and Morgan Stanley, for an amount of EUR 987.86 million each, which covers the whole of the consideration offered, i.e. EUR 2,963.57 million.

  • The offer has been recommended by MásMóvil directors. A break fee will be payable by the offeror if a competing offer is announced and Lorca’s offer lapses or is withdrawn.

    • 0.76% of the value of the offer (€22.6 mn).

The bidders have offered a EUR 120 mn bonus to 13 key executives, conditional to certain milestones being achieved over three years. This scheme could be extended to more employees.

The worsening of the Covid-19 economic crisis should favour growth in the low cost segment.

The market will favour inorganic growth in the near future. Last week’s ruling by the EU Courts against the European Commission’s veto on the merger of O2, a British subsidiary of Telefónica, with its competitor Three, because it reduced the number of network operators, has opened a new scenario for mergers between operators in different European countries. An example is the merger between O2 and Virgin (Liberty) in the UK.

MásMóvil has closed on 1 June at EUR 23.18, 3% above the offer price. The market believes that the transaction will close and there will be an improved offer.

On a quick LBO calculation, a cumulative IRR of c. 20% could be obtained by year 8 (i.e. 2027).

The consideration does not seem a knock-out offer and other suitors may appear, in my view. The consortium appears to have given itself some room to improve the bid price to a level of EUR 26 per share, in line with the median of close comparables. On this basis, the recommendation is Long MAS SM with a target price of EUR 26.

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