PAYA - Nuvei Acquires Paya: Qualitatively And Quantitatively Accretive

Summary

• Nuvei acquired integrated services and B2B payment provider, Paya Holdings, for $1.3B dollars.
• Nuvei's intrinsic value increased by 30%, from $33 a share to $43 a share as a result of this acquisition, since my last valuation.
• Nuvei improved its risk/reward profile by reducing revenue concentration in the cyclical global-commerce space.
• Nuvei bought Paya for a fair price with an unalarming amount of debt and critically no dilution.

Prior Analysis

I covered Nuvei ( NVEI ) stock in early January, rating it a "Buy" because the price then, around $25/share, was considerably lower than what I considered to be the intrinsic value: roughly $33/share. I based this evaluation on strong leadership from founder, CEO and 20% share owner Philip Fayer, substantial growth, astronomical margins, big cash flow, smaller market cap, large addressable market, top-tier technology, products and services, sufficient returns on capital and a valuation that appeared undemanding. The stock was not without its drawbacks, however.

One weakness of Nuvei was the revenue concentration in cyclical industries. It operates in global e-commerce, with a special concentration in regulated online gaming (mostly sports betting) which made up 25% of its revenue. The prior analysis expected significant volatility as a result. Another weakness of Nuvei, and why I required a large margin of safety, was the lack of significant competitive advantage. The payment services market is loaded with high-class companies like PayPal ( PYPL ), Stripe ( STRIP ), and Block ( SQ ). Overall, I considered these weaknesses to be made up for in the valuation and, of particular note in light of recent events, the financial safety and flexibility afforded by its fortress balance sheet.

At the time, Nuvei had $750M of cash, and only $500M of debt. I expected it to manifest itself in share buybacks, but I was wrong, they used this flexibility to acquire a highly complementary company in the payment space: Paya Holdings ( PAYA ).

Is this good for Nuvei and its stock? Goldman Sachs thinks so , saying, "We believe investors will have greater appreciation for the dislocation between fundamentals and valuation for NVEI, which should ultimately drive shares to re-rate higher from currently depressed levels." I agree, and so does the market, judging by the nearly 15% increase in NVEI's share price since the acquisition. Let's check why we're bullish.

Qualitative Analysis

CEO Fayer noted in the webcast discussing the acquisition that it "...will accelerate our integrated payment strategy, diversify our business into key high-growth non-cyclical verticals with large addressable end markets and enhance the execution of our growth plan." Integrated payment solutions, diversification outside of e-commerce, and continued growth opportunities were the key strategic reasons behind this acquisition.

Firstly, according to a Financial Post article summarizing the acquisition , the integrated payment solutions market was the fastest growing card-payments channel in the US, with 41% of new merchants signing up for the service. The value of having accounting processes and payments automated is clearly significant to businesses. Nuvei's integrated payment solutions were lagging behind, so Paya's complementary technology will benefit Nuvei as they try to penetrate this market and cross-sell existing clients.

Secondly, Paya Holdings focuses on completely different verticals than Nuvei. Where Nuvei focuses on global e-commerce (especially regulated online gaming like sports betting), Paya customers are mainly Independent Software Providers (ISVs), healthcare providers, utilities, and government services, all of which provide more stable revenue than e-commerce. As noted earlier, this was a drawback to Nuvei, the cyclicality of the verticals it served, and this acquisition diversifies its revenue considerably.

Were it to go through, online gaming would become 17% of sales, down from 25%. Still not ideal, but certainly progress. Nonetheless, the reduction is good news for shareholders and makes the company more attractive to prospective investors.

Lastly, this acquisition creates more optionality for growth at the company. Where before the growth was largely going to follow global e-commerce trends, now, in addition to integrated payment solutions, Nuvei is exposed to business-to-business transactions. As the Post article points out, that market is growing at 10% per year, for a TAM in 2026 of $2.3T, a significant sum. Now that Nuvei has purchased an established footprint in these markets, they have more options in which to re-invest their considerable cash flow. Reliance on e-commerce for growth has been reduced; growth opportunities have increased.

To sum, through the acquisition of Paya, Nuvei is qualitatively improving its business by diversifying Nuvei's capabilities, growth markets, and importantly, revenue mix, making it considerably less cyclical. This development benefits current shareholders and would certainly attract more investors.

Quantitative Analysis

Quantitatively, Nuvei intends to pay $1.3B cash for Paya, $700M from cash and $600M from credit (notably, they've avoided diluting shareholders). Is this worth it? Let's investigate:

As we can see in the above table, Nuvei increases debt to $1.1B and uses most of its cash. Enterprise Value (EV, market cap - cash + debt), shoots up as a result. Is this added debt a risk?

If Nuvei can easily pay that debt in the future, we need not worry too much. To find out if that is the case, we need to check free cash flow. Nuvei makes this slightly more complicated by using "Adjusted EBITDA" as a cash flow proxy and "Adjusted EBITDA - Capex" as a free cash flow proxy. The reconciliation of those proxies is below.

The way Nuvei estimated the combined company's 2022 free cash flow was to add the previous 3 months' financials to the previous 9 months. Though not an ideal method, it will suffice.

As we can see in the table below under "Net Debt to FCF", this new debt burden is covered by approximately three years of the combined company's 2022 free cash flow. This isn't too bad, especially considering the fact that free cash flow is likely to grow into the future; the added debt doesn't worry me too much.

This is especially the case because of what Nuvei is getting for this increased debt load. As we can see above, Nuvei increases payment volume by 40%, revenue by 33%, and FCF by 21% with this deal. Their free cash flow margin is reduced by only 3% to 35%. Nuvei paid around 20x trailing free cash flow for Paya, which, while not a bargain, is not overpaying either. From a P/FCF perspective, NVEI stock got 11% cheaper but has run up in the week following the acquisition. On an EV/FCF basis, NVEI stock got 32% more expensive, roughly in line with value added. As we said, the debt is not too concerning, so I consider the stock to have gotten cheaper.

How does this affect the intrinsic value? Positively, to say the least. I conducted a discounted cash flow analysis using the following assumptions:

I changed my previous valuation by incorporating the combined company's estimated 2022 numbers, reducing my revenue growth assumption from 20% per year to 18% (to account for Paya's slower growth), reducing my margin growth assumption from 1% per year to 0.5% per year (to account for Paya's static margins), and keeping the discount rate and 2027 multiple the same as before. Notably, the 14 multiple on FCF could be considerably undershooting reality, as FCF is set to grow at over 20% per year and reducing cyclicality in the business could lead to more buyers and a re-rating. But this is hypothetical, so I've stayed conservative. These adjusted assumptions yield the following intrinsic value:

In my estimation (which I am more than happy to hear pushback on), the acquisition of Paya increases the intrinsic value of Nuvei by 30%, to around $43/share. This is impressive, especially considering shareholders are not being diluted, and the business is becoming significantly more diversified. One of the largest drawbacks to Nuvei was its cyclicality and concentration in regulated online gaming; this deal helps that tremendously.

The last valuation estimated that Nuvei was undervalued by 25% before any multiple expansion. As the dust settles, the price has reset to that same undervaluation, and as such, I continue to rate it a Buy.

Conclusion

Essentially, Nuvei just bought a year's worth of unexpected growth without diluting shareholders, enhanced its product offerings, and gained access to key new markets, all while diversifying its revenue mix to be less cyclical. To do so, Nuvei took on an unalarming amount of debt and paid a fair price. As a result, Nuvei increased its intrinsic value from ~$33 a share to ~$43 a share. This I would call a success.

The lack of significant competitive advantage continues to be a concern, thus a generous margin of safety is required. In my estimation, a safe entry point would be anything under $32 a share. Goldman Sachs, for their part, mostly agrees, suggesting a 1-year price target of $30 a share.

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