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Case study – Paysafe’s millions to billions journey in 2015

22/12/2015

At the start of 2015, AIM listed online payments processor Optimal Payments PLC had a market valuation of £324m. Today the renamed Paysafe PLC is worth £1.6bn and has an enterprise value of almost £2bn, and moves to the main market of the London Stock Exchange tomorrow, 23rd December 2015. Alongside an acquisition and accompanying equity and debt issues that were the catalyst for the share price and valuation rise, new CFO Brian McArthur-Muscroft was looking to improve investor transparency in a sector that can be difficult to analyse from the outside. He asked Oakhall to assist in this process. We worked with the finance team and executives to improve revenue growth and cash flow disclosure, and the company received positive feedback from the investment community as a result.

In March 2015, Paysafe announced the £800m acquisition of Skrill, a digital wallet and prepaid card business. The deal roughly doubled the size of the business in profit terms. To fund the acquisition Paysafe launched the largest ever AIM rights issue, raising £452m in April 2015. In parallel Paysafe arranged for the placing of EUR500m in debt. And it announced a move from AIM to the London Stock Exchange main market.

The payment processing sector can be difficult to analyse

Payment processing is not a well-understood sector in the European investment world and this had weighed on Paysafe’s valuation in previous years. Analysing the business was not easy. In some cases, merchant and consumer transaction revenue flowed through Paysafe’s balance sheet, distorting the cash flow statement and making it difficult to measure underlying free cash flow. This is a problem faced by the broader sector and at least one of Paysafe’s peers has been criticised for its disclosure.

The new CFO was keen to be as transparent as possible and the company was releasing H1 2015 results just a couple of weeks after the Skrill transaction closed. First the team looked at revenue disclosure.

Improved underlying revenue disclosure

Paysafe had in the past shown charts of just the first-half revenue in its interim results deck. This is not helpful to busy investors and analysts who like to see the full half-year picture including second half numbers which are not usually disclosed in financial statements.

So the team reworked how divisional results would be disclosed, adding in historic organic and constant-currency growth rates to strip out the impact of acquisitions and fluctuating currency. The company also separately showed the impact of one major merchant that represented just under 20% of the combined group’s revenue.  It is often a red flag for investors if acquisitive companies do not disclose organic growth.

The result was a much more comprehensive picture of the division’s progress, and it included gross margin trend which was falling, but for legitimate reason (the fast growing US business was a lower gross margin operation). Better to be up-front about this than to be asked about it on the results conference call.

paysafe h115 revenue

 

Clearer cash flow disclosure

Then the team had to decide on how to better disclose cash flow. Paysafe had previously tried to differentiate between its own and customer cash, but investors could not reconcile this back to the published financial statements or see how this impacted free cash flow, resulting in confusion. It is always better for company disclosure to reduce, not increase, the amount of work required by investors to understand the business.

The team overcame this problem by adding several new balance sheet line items to differentiate trade payables and receivables that underlie Paysafe’s revenues and costs, and what the company labelled “payments working capital” that represented transient cash receivables (usually from consumers en-route to merchants), payables (to merchants), and any restricted cash of deposits required by regulators or counter-parties.

The problem with not separating out payments working capital is that it can lead to large receivables or payables that happen to exist on the balance sheet date distorting underlying business cash flow. Key here was to make it easy for the investor to choose how they analysed the figures, rather than publishing Paysafe’s own “adjusted” cash flow. As with the revenue disclosure the idea is to avoid an opaque set of financial statements that take time to analyse.
paysafe h115 cash flow

The new disclosure was coupled with explicit balance sheet, cash flow, and cash conversion detail in the H1 2015 results slide deck that had not been presented in the past. It is very important not to focus entirely on the income statement as a large and often attractive long-term group of investors are very focused on cash flow and capital employed.

76% share price appreciation this year

In November Paysafe hosted its first Capital Markets Day for investors and analysts in the run up to its move to main market. As a result of an accretive acquisition, improved disclosure and transparency that was well received by investors, dilution of major merchant customer concentration, the move to main market, and continued operational performance, Paysafe’s share price has risen 76% so far in 2015.

 

Related Links:
Paysafe H1 2015 and 2014 results decks
David Thornton – Rights Issue is a Great Deal for Existing Investors

Andrew Griffin spent almost two decades as a technology equity analyst before working in investor relations, corporate development and market intelligence for a UK listed software company. In 2015 he set up Oakhall to provide smart financial analysis and articulation for European public and private companies.