Net 1 UEPS Technologies, Inc. (NasdaqGS: UEPS; JSE: NT1) (the
“Company” or “Net1”) today announced it has signed a definitive
agreement to acquire 100% of the Connect Group for a consideration
of approximately ZAR 3.7 billion (the “Acquisition”), or $242.0
million at an exchange rate of $1: ZAR 15.22. The acquisition of
the Connect Group, a profitable, high-growth and leading South
African fintech company, is transformational for Net1 in its
journey to becoming South Africa’s leading fintech platform. The
Acquisition is expected to close in the quarter ending March 31,
2022, as it is subject to regulatory approval and satisfaction of
customary closing conditions.
Quote from Chris Meyer, Net1 Group
CEO
“Our vision is to transform Net1 into the
leading South African fintech platform, offering payment processing
and financial services to underserved merchants and consumers. The
acquisition of the Connect Group transforms our merchant offering,
MSME footprint and growth trajectory, while also uniquely
positioning us to be the South African market leader serving both
merchants and consumers,” said Chris Meyer, Group CEO of Net1.
“Further, Connect Group advances our mission of financial inclusion
by bringing into the Net1 fold a base of 44,000 MSMEs, many of whom
are informal businesses. We welcome the Connect Group’s
high-caliber team to Net1 and are confident that the combined group
will significantly exceed the sum of the parts.”
Quote from Steven Heilbron, Connect
Group CEO
“As a standalone business, Connect Group has
become one of South Africa’s fastest growing fintech businesses
serving MSMEs,” said Steven Heilbron, CEO of the Connect Group.
“Having spent a lot of time with the Net1 management team and
directors over the last year, I believe that the combined
management teams of the Connect Group and Net1 will work very well
together. I am very confident that this transaction fast tracks the
combined businesses which together, now has the essential and
differentiated building blocks required to deliver on the focused
objective of being the leading South African fintech platform. We
believe that this transaction will create distinct field advantages
and will take the group to heights that neither entity would
achieve alone.”
Overview of the Connect
Group
Founded in 2006, the Connect Group is a
profitable, high-growth and leading provider of financial
technology solutions to nearly 44,000 micro, small and medium
enterprises (“MSMEs”) in Southern Africa. As at February 28, 2021,
the Connect Group’s customer base includes more than 8,600 formal
MSMEs and over 35,000 informal MSMEs.
The Connect Group delivers four main product
lines to its customer base under well-established and respected
brands:
- A prepaid value-added services
platform branded Kazang;
- A digitized cash management
platform branded Cash Connect;
- A merchant lending platform branded
Capital Connect; and
- Merchant acquiring solutions
branded Kazang Pay and Card Connect.
Taken together, the Connect Group is a unique
full-service provider – across cash and digital – of financial and
value-added services to formal and informal MSMEs in Southern
Africa. The Company believes that the Connect Group is very well
positioned to grow into its large addressable market, which is
estimated at approximately 0.7 million formal MSMEs and 1.4 million
informal MSMEs in South Africa.
The Connect Group has reached significant scale
and continues to grow swiftly. In its last financial year ended
February 28, 2021, the Connect Group grew earnings before interest,
depreciation and amortization (“EBITDA”) by approximately 30% on
the prior year, notwithstanding the significant impact of COVID 1st
wave level 5 and 2nd wave level 3 lockdowns on the SA economy and
MSME segment that it serves. The Connect Group settled cash of ZAR
79.5 billion ($4.8 billion) through its retail cash vault
infrastructure, sold ZAR 13.2 billion ($799.4 million) of
value-added services through its point-of-sale (“POS”) terminals
and digital wallets, advanced over ZAR 280 million ($17.0 million)
in growth capital to SME businesses, and processed ZAR 2.6 billion
($157.5 million) in card transactions through its POS terminals.
This resulted in net revenue of approximately ZAR 1.1 billion
($66.6 million), which represents a historic three-year compound
annual growth rate of approximately 30%. Net revenue is a non-GAAP
measure and is described below under About Connect Group together
with a reconciliation to the GAAP measure. All amounts translated
at the average exchange rate for the year to February 28, 2021 of
$1: ZAR 16.51.
The Connect Group is highly profitable with
strong unit economics – delivering an historic three-year compound
annual growth rate in EBITDA in excess of 40% for its financial
year ended February 28, 2021.
The Connect Group has significant opportunities
for continued growth within its current addressable market,
estimated at more than ZAR 100 billion ($6.6 billion), in merchant
financial services for MSMEs in South Africa. Further, this
addressable market has strong secular growth due to MSMEs shifting
from manual to digitized cash management and from physical cash to
digital payment methods.
Consideration and Funding (all amounts
below translated at an exchange rate of $1: ZAR 15.22, unless
otherwise specified)
- Net1 will acquire 100% of the
Connect Group for a consideration of approximately ZAR
3.7 billion, or $242.0 million at current exchange rates.
After adjusting for net debt and debt-like items, the implied
Enterprise Value (“EV”) is ZAR 4.8 billion, or $315.3
million.
- The parties have agreed that the
consideration will be reduced on a rand for rand basis by the
amount by which the actual EBITDA, as defined in the transaction
documents, is lower than the expected EBITDA of ZAR 375.0 million
($24.6 million), for the current financial year ending February 28,
2022 (“Target 2022 EBITDA”).
- Included in the EV is a retention
mechanism for key Connect Group employees, in terms of which Net1
will grant approximately 1.3 million shares of restricted stock to
the employees (calculated using a base of ZAR 138.7 million divided
by $1: ZAR 14.78 and an issue price of $7.50 per share), which will
vest in three equal tranches on the first, second and third
anniversaries of the closing of the Acquisition. The issuance is
pursuant to Net1’s current stock plan, is subject to a top-up
mechanism, and includes good and bad leaver provisions.
- The Acquisition will be funded as
follows:
- ZAR 2.35 billion ($154.4 million)
in debt, consisting of ZAR 1.1 billion ($72.3 million) in a
five-year term facility and a ZAR 150 million ($9.9 million)
general banking facility that replaces the Connect Group’s existing
debt facilities and ZAR 1.1 billion ($72.3 million) in 18-month
bridge facilities secured against Net1’s assets;
- Deferred consideration of ZAR 350
million ($23.0 million) to be settled through the issuance of
approximately 3.1 million Net1 shares of common stock at an issue
price of $7.50 per share and payable in three equal tranches on the
first, second and third anniversaries of the transaction closing;
and
- The remaining balance will be
funded by existing Net1 cash resources.
- Net1 has signed term sheets for the
ZAR 2.35 billion ($154.4 million) debt package with a leading South
African bank. These include a credit enhancement mechanism of ZAR
350 million ($23.0 million), which will be provided by investment
funds managed by Net1’s largest shareholder, Value Capital Partners
(Pty) Ltd, on commercially agreed terms, which include a contingent
subscription for new shares.
- At closing, the net leverage ratio
on the ZAR 1.1 billion ($72.3 million) term facility for Connect
Group is expected to be less than 3x and the asset cover ratio on
the ZAR 1.1 billion ($72.3 million) bridge facilities for Net1 is
expected to be greater than 7x as measured against the fair value
of Net1’s assets based on its June 30, 2021, balance sheet.
- At closing, the transaction
trailing EV/EBITDA multiple, as calculated from the Target 2022
EBITDA is expected to be approximately 12.8x. The Connect Group’s
EBITDA for the financial year ending February 28, 2023 is
expected to grow in line with recent historic growth rates, which
is expected to result in the forward 12-month EV/EBITDA multiple
being significantly lower.
Strategic Rationale
Net1 has previously communicated its vision to
transform into the leading fintech platform for underserved
consumers and merchants in South Africa. The acquisition of the
Connect Group significantly advances that vision and is
transformational for Net1. The combination of Net1 and the Connect
Group is strategically important for the following reasons:
-
Combining complementary product offerings to drive stronger
unit economics: the Connect Group fills four key gaps in
Net1’s product offering, namely the provision of value-added
services directly to MSME’s, digitized cash management, merchant
acquiring and merchant lending. On the other hand, Net1 brings
issuing, insurance and consumer financial services infrastructure
to the Connect Group. Offering multiple products to a single
customer reduces churn, increases take-rate and improves unit
economics.
-
Expansion of addressable market to informal MSMEs:
while Net1 has an established presence amongst formal enterprises,
it does not currently serve any of South Africa’s estimated 1.4
million informal MSMEs. Connect Group serves over 35,000 informal
MSMEs and is a leading provider of financial services to this
growing customer segment.
- Attractive financial
profile with strong and profitable growth: the Connect
Group has delivered exceptional historical growth in throughput,
revenue, earnings and free cash flow. Further, there is significant
room for continued growth, supported by secular tailwinds.
- Merging highly skilled
teams with complementary expertise: the Connect Group has
a proven track record of successfully launching and commercializing
innovative financial solutions and a demonstrated ability to
successfully integrate with new operating groups.
- Better serving the
underserved: Net1 and the Connect Group are united by
their commitment to provide dignified financial services to people
and businesses who are underserved by the financial system. Net1’s
base of more than one million retail customers and the Connect
Group’s base of over 44,000 MSME customers are underserved by
traditional financial services.
Investor Presentation
Net1 has posted an investor presentation with
additional information about the transaction on the Net1 homepage,
www.net1.com.
Conference Call
The Company will host a conference call to
review the transaction on November 1, 2021, at 8:30 a.m. Eastern
Time. To participate in the call, dial 1-508-924-4326 (US and
Canada), 0333-300-1418 (U.K. only) or 010-201-6800 (South Africa
only) ten minutes prior to the start of the call. Callers should
request “Net1 call” upon dial-in. The call will also be webcast on
the Net1 homepage, www.net1.com. Please click on the webcast link
at least ten minutes prior to the call. A webcast of the call will
be available for replay on the Net1 website.
Participants can pre-register for the November
1, 2021, conference call by navigating to
https://services.choruscall.za.com/DiamondPassRegistration/register?confirmationNumber=2728505&linkSecurityString=4be8856cc.
Participants utilizing this pre-registration service will receive
their dial-in number upon registration.
Advisors
Net1 was advised by Rand Merchant Bank, a
division of FirstRand Limited and Cliffe Dekker Hofmeyr provided
legal counsel. Proton Partners acted as strategic advisor to
Net1.
Connect Group was advised by Investec Corporate
Finance, a division of Investec Bank Limited and Edward Nathan
Sonnenbergs Incorporated provided legal counsel.
About the Connect Group
The Connect Group is one of the fastest growing
payment solutions providers in Southern Africa, providing services
such as bill payment, prepaid value-added services, digitized cash
management, merchant lending and merchant acquiring to nearly
44,000 merchants. The group includes established and highly
respected brands such as Kazang, Cash Connect, Capital Connect and
Kazang Connect. Visit www.connected.co.za for additional
information about the Connect Group.
The Connect Group prepares its financial
information under International Financial Reporting Standard for
Small and Medium Enterprises ("IFRS”); as such they may differ
materially from US GAAP.
Use of Non-GAAP Measures
U.S. securities laws require that when we
publish any non-GAAP measures, we disclose the reason for using
these non-GAAP measures and provide reconciliation to the most
directly comparable GAAP measures.
The Connect Group purchases and resales prepaid
airtime products and records the gross amount received from the
sale of the airtime in revenue and the cost related to the airtime
sale in expenses. The operating margin (the sum of revenue less
expense (“net revenue”) divided by revenue) generated by resellers
of prepaid airtime in South Africa is generally lower than 10%,
which is significantly lower than the operating margin realized by
the Connect Group’s other business lines. Management believes that
the net revenue metric enhances its own evaluation of the Connect
Group, as well as an investor’s understanding, of Connect Group’s
financial performance, because investors generally analyze
transactions of this nature on a net basis.
The reconciliation between revenue under IFRS
and net revenue for the year ended February 28, 2021, is presented
below:
|
Year ended February 28, 2021 |
|
ZAR ‘000 |
$ ‘000(1) |
Revenue under IFRS |
4,571,283 |
276,832 |
Less: Adjustment for cost of prepaid airtime |
3,461,717 |
209,638 |
Net revenue – non-GAAP |
1,109,566 |
67,194 |
(1) Translated at the average exchange rate for
the year ended February 28, 2021 of $1: ZAR 16.51.
About Net1
Net1 is a leading financial technology company
that utilizes its proprietary banking and payment technology to
deliver on its mission of financial inclusion through the
distribution of low-cost financial and value-added services to
underserved consumers and merchants in Southern Africa. Net1 also
provides transaction processing services, including being a payment
processor and bill payment platform in South Africa. Net1 leverages
its strategic investments to further expand its product offerings
or to enter new markets.
Net1 has a primary listing on NASDAQ (NasdaqGS:
UEPS) and a secondary listing on the Johannesburg Stock Exchange
(JSE: NT1). Visit www.net1.com for additional information about
Net1.
Forward-Looking Statements
This announcement contains forward-looking
statements that involve known and unknown risks and uncertainties.
A discussion of various factors that may cause actual results,
levels of activity, performance or achievements to differ
materially from those expressed in such forward-looking statements
are included in our filings with the Securities and Exchange
Commission. With respect to our proposed acquisition of the Connect
Group, additional factors that could cause actual results to differ
materially from those indicated or implied by the forward-looking
statements include, among others: (1) the occurrence of any event,
change or other circumstances that could give rise to the
termination of the share purchase agreement relating to the
proposed acquisition; (2) the ability to satisfy all conditions to
completion of the proposed acquisition, including obtaining
regulatory approvals; (3) unexpected costs, charges or expenses
resulting from the transaction; (4) the disruption of management’s
attention from our ongoing business operations due to the proposed
acquisition; (5) changes in the financial condition of the markets
that the Connect Group serves; (6) risks associated with the
Connect Group’s product and service offerings or its results of
operation including reduced cash settlements through Connect
Group’s vault infrastructure or higher cash losses, lower than
expected growth in Connect Group’s value added services, lower than
expected levels of loan advances or higher credit losses and slower
than expected growth in card transactions; (7) the challenges,
risks and costs involved with integrating the operations of Connect
Group with ours; and (8) our ability to realize the anticipated
benefits of the proposed acquisition. The Company undertakes no
obligation to revise any of these statements to reflect future
events.
Investor Relations
Contact:ICREmail: net1IR@icrinc.com
Media Relations Contact:Bridget
von HoldtCo-Market Leader | MD – BCWPhone: +27-82-610-0650Email:
Bridget.vonholdt@bcw-global.com
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