Optimal Payments has expanded its digital wallet with the €1.1bn reverse takeover of rival Skrill in a move that will propel the combined online payments business into the FTSE 250.
The company said the “transformational” deal would broaden its exposure to the “rapidly expanding online gaming sector” as well as the wider e-commerce world
The group has developed a payments technology system allowing gamblers to transfer winnings and place stakes across a range of gaming websites at the touch of a button, as well as enabling rapid-fire payments for live sports betting.
Skrill’s paysafecard brand is one of the largest pre-paid online voucher providers in Europe, enabling consumers without a bank account or credit card to purchase goods and services online.
“We thought they were out fishing for sprats and they have landed a whale,” said Ivor Jones, leisure analyst at Numis. “At a stroke, it brings a major competitor on board, sharply reduces [Optimal’s] exposure to Asia and brings credible venture capital investors on to the share register.”
Shares in Aim-traded Optimal were suspended on Monday morning after it announced the proposed acquisition, to be financed by a fully underwritten £451m rights issue plus existing cash and debt facilities, after which it will relist on the main market.
Skrill, which shelved plans for a £160m listing in 2011 and was once chaired by the former investment banker Bob Wigley, is majority owned by CVC Capital Partners. The private equity firm acquired a majority stake in the business for €600m from Investcorp 18 months ago.
“PayPal is the 800 pound gorilla in this industry, and while I’m not sure we’re in their rear view mirror yet, there’s room for a number two,” said Joel Leonoff, Optimal’s chief executive, adding that the deal was “a very significant acceleration of our business plan”.
As well as online gaming, the group has ambitions to target a greater share of the mobile payments market, although it faces stiff competition from tech giants Apple, Samsung and Google.
The space is rapidly consolidating as payment providers try to scale up as quickly as possible in the heavily regulated space. Last November, Skrill itself announced that it was acquiring another competitor, Ukash, in a deal that is yet to be completed.
Beneath it all is the growing dominance of smartphones in ecommerce and online gaming. “It actually sits on something more fundamental, which is the move towards mobile commerce. It’s the mobile ecosystem that’s emerging here,” said Robin Speakman, analyst at Shore Capital.
Digital wallets are an increasing necessity for online gamblers, who tend to play across multiple sites. Customers in “grey” markets, where online gambling is not formally regulated, also use wallets as a way of moving their money to gambling websites.
“In certain jurisdictions Visa and MasterCard are not available for online gambling,” said Gavin Kelleher, analyst at Goodbodys.
Mr Leonoff said that customers used their wallets as a “hub” to move money between websites like PartyGaming, PokerStars and 888.
Higher transaction speeds offered by digital wallets were crucial for live sports betting, he added: “If you’re watching a tennis game, you can bet whether a serve is going to be in or out, so it has to be really fast.”
The combined business would be well placed to target demand from emerging markets and the rapidly evolving mobile payments market, he said.
“We also cater to a very significant proportion of the world that is unbankable and doesn’t have the facilities to provide credit cards. We have helped the online gaming companies gain access to customers in South America where US-verified credit card payments were hard to obtain, which has greatly facilitated approval ratings.”
Optimal said it would acquire the entire listed share capital of Skrill for €720m cash and 37.5m new ordinary shares, after which parent company Sentinel Group Holdings would own nearly 8 per cent of the group.
Optimal said the deal had an enterprise value of €1.1bn, valuing Skrill at a multiple of 9.3 times earnings before interest, tax, depreciation and amortisation for the 12 months to September 2014, adjusted to reflect ongoing annual cost saving synergies of $40m, plus net debt of €256m.
The combined group would have annual revenues approaching $700m, and ebitda of $175m, Optimal said, diversifying its geographic exposure and customer base, offering over 100 payment types in 41 currencies and 22 languages. This would enable Optimal to “capitalise on expected growth in the North American regulated online gambling market,” the company added.
Optimal’s full-year results, released in tandem with its announcement on Monday, showed an 83 per cent increase in profit after tax to $57.7m on revenues that increased 44 per cent to $365m in the year to December 31.
The results were boosted by the acquisition of the Meritus and GMA businesses in the US last summer, plus a “significant” contribution from the World Cup.
Optimal intends to raise £451m through a five-for-three rights issue priced at 166p per share, a 60 per cent discount to Friday’s closing price of 419p, which has been fully underwritten by Canaccord Genuity, Deutsche Bank and BMO Capital Markets. Lazard additionally advised Optimal on the transaction.
Optimal said it had received “significant” shareholder support for the rights issue, including its largest shareholder Old Mutual which holds an 11.3 per cent stake.
If shareholder approval is granted at a general meeting on April 16, the new shares are expected to start trading on Aim a day later, with the acquisition expected to complete “in the third quarter of 2015”, the company said.