The EML Payments Ltd (ASX: EML) share price will be under the spotlight today after revealing a sizeable acquisition.
What is EML acquiring?
EML said that it’s going to acquire Sentenial Limited, including the open banking product, Nuapay, for an upfront enterprise value of €70 million, plus an earn-out component of up to €40 million.
Sentenial was founded in 2003 and built a technology platform. EML says it’s the leading provider of account to account payments across the UK and Europe. Sentenial has major banking customers including Barclays, Lloyds and Citibank with a bank-grade platform as well as other solutions.
Not only does it help major banks (four of the top seven banks in the UK), but it also helps blue chip enterprises, small and medium sized businesses (SMEs) and payment service providers.
The majority of the business is the provision of direct debit, credit transfers and real-time payments for major European banks with annual volumes of more than €45 billion in the 2020 calendar year.
Sentenial provides the software platform through a software as a service (SaaS) revenue model with fixed recurring charges for access to the platform and the yield is 1 to 2 basis points (0.01% to 0.02%).
But that’s not all.
In 2018, the platform was extended to open banking and has since connected to over 1,750 banks and financial institutions across Europe, servicing important customers like Worldpay and Cybersource. This product is integrated within Nuapay’s account to account capabilities, in 2020 it processed €600 million of volume. Nuapay typically provides regulated services using payment institution licences and generates higher yields of around 30 basis points to 45 basis points (0.30% to 0.45%).
The combined group is expected to process more than A$90 billion of gross debit volume (GDV) in FY22.
What’s the thinking behind the acquisition?
EML said that after the acquisition, it will be a leading global player and one of the largest independent fintech enablers in opening banking and prepaid anywhere in the world. It’s currently connected to 1,750 banks (and growing) across Europe.
Management said that Sentenial has a highly scalable platform that has had continual investment to future proof the business and allows for agile deployments and rapid growth. EML said it’s well positioned to export the technology globally.
With scheme payments as well as account to account payment solutions under one business, EML would be “uniquely positioned” to support clients. It’s leading the race to mass market a single payment that offers all payment types.
EML intends to expand Sentenial’s platform to other regions in the next 12 to 18 months.
Management comments
EML Managing Director and CEO Tom Cregan said: “EML has transitioned over the years from primarily a gift-card company to a company with a diverse revenue base across multiple prepaid products.
“The net result of bringing the companies together allows EML to increase our total addressable market by expanding our product suite, and we see a number of opportunities to cross-sell account to account payments into existing EML customers, and vice versa.”
Summary thoughts about the EML share price and the deal
This seems like a really smart deal by EML. It could add a lot of capabilities to the business, without that much of a cost. When you add this to the PFS acquisition, I think the last 12 months of deals will transform the business into a major global player.
The EML share price is priced at 29 times the estimated earnings for the 2023 financial year according to CommSec. It looks good for a long term buy in my opinion. It’s one of the leading ASX growth shares I’m looking at.
