VeriFone (NYSE:PAY) is a curious company. It is about to operate in a duopoly that arguably should not exist - who would have thought that there would be just two providers of electronic payment solutions for credit, debit and gift card transactions? It also happens to carry a rather rich multiple.
What makes the situation even more interesting today is that its sole pure-play rival may have inadvertently done the company a major favor. If rumors and numerous press accounts are accurate, Ingenico (perhaps under some pressure from the French government) rejected a buyout bid from American conglomerate Danaher (NYSE:DHR).
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The Deal That Wasn't
According to those same sources, Danaher offered $1.9 billion, or about 28 euros per share, for Ingenico. Although that deal would not have represented much of a premium to the stock's recent trading price, these shares were below 16 euros before the summer began. Then again, a $1.9 billion bid would not represent all that much of a premium in terms of multiples either. Based on analyst expectations, that deal would represent only 1.6 times sales and less than 10 times EBITDA - relatively meager given that VeriFone trades at approximately twice those multiples.
Not Just About the Money?
If reports are to be believed, it was not just the valuation of the deal that was an issue. Apparently, the French government sees Ingenico as some sort of "essential" company to France's electronics industry and is not willing to see a foreign company acquire it.
This would not be the first time that perceived national interests scuttled a deal in France. Novartis (NYSE:NVS) was blocked from acquiring Aventis years ago and the French government pushed for a deal with Sanofi (NYSE:SNY). Likewise, the government stepped in to shield Alstom and pushed the merger of Gaz de France and Suez in part to block Italy's Enel from getting Suez.
To that end, there was apparently an issue with Danaher not being on board in allowing Safran, a large minority owner of Ingenico and itself part-owned by the government, to maintain a minority ownership position going forward. If that is all true, it likely will not make a difference if Danaher is willing to up its bid; if the French government does not want Ingenico in non-French hands, money is not going to sway them.
That being said, it feels like it is a matter of time before one or both of these companies is brought into the fold of a larger entity. After all, is it so unreasonable to think that KKR (NYSE:KKR) might want to combine VeriFone with its First Data, or that Fujitsu, Wincor Nixdorf, or NCR (NYSE:NCR) could be interested? That said, NCR would be an interesting suitor given its market cap is two-thirds that of VeriFone, while its revenue base is four times larger!
Good for VeriFone?
All in all, this may end up being a really good stroke of luck for VeriFone. Ingenico is now a leader in point-of-sale terminals and the combination of that with Danaher's Gilbarco Veeder-Root (which is especially strong in fuel retail point-of-sale) would have been powerful. Moreover, it stands to reason that Danaher would have pushed hard to improve Ingenico's market share in the United States (where VeriFone is stronger) while maintaining its business in Europe.
Simply put, it is usually better to compete against rivals who are similar in size. Danaher tends to be hands-off with many of its operating companies, but gives them access to a much larger capital base if their performance merits it. Consequently, Ingenico may have been just as fierce of a rival and not hampered by the bureaucracy of a large company, while having access to large-company capital and synergies with Danaher's other operating units.
The Bottom Line
On its own, and with Hypercom in the fold, VeriFone can likely continue to compete very effectively with Ingenico. While valuation is reason to pause on these shares, it is hard to see how electronic payment systems are not going to be a major growth opportunity as countries like Brazil, China and India grow more prosperous and their consumers adopt electronic payments, to say nothing of lucrative ongoing opportunities in the developed world. (For more, see Does International Investing Really Offer Diversification?)
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