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Ingenico: The Acquisition By Worldline Is Happening At A Fair Price And Creates An Arbitration Opportunity – Ingenico Group – GCS (OTCMKTS:INGIF)

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It has been almost three years since I first looked at Ingenico (OTC:INGIF) (OTCPK:INGIY), when the company was trading at 80 EUR per share. And it has been a rough ride for Ingenico as less than 15 months ago, its share price dipped to the mid-40 EUR range, which I thought was a buying opportunity. In the past twelve months, Ingenico’s share price has more than recovered the lost ground and its excellent financial performance caught the attention of Worldline (OTC:WWLNF) (OTC:WRDLY), which has made an offer to acquire all outstanding shares of Ingenico.

Source: Yahoo Finance

Ingenico is a French company and its listing on Euronext Paris clearly is the most liquid trading venue. The average daily volume is around half a million shares per day, and the current market capitalization is approximately 6.4B EUR based on a net share count of approximately 62M shares.

Ingenico’s free cash flow result: Strong

In 2019, Ingenico’s revenue increased by 10% on a comparable basis to 3.37B EUR while the EBITDA result came in at 606M EUR (18% of the revenue) while the net debt remained under control at just over 1.3B EUR. The net income of 208M EUR or 3.35 EUR per share was fine but what I was really interested in was Ingenico’s free cash flow result, as that’s the metric my previous articles were based on.

Source: financial statements

Ingenico reported an operating cash flow of 469M EUR before changes in the working capital but this included a 65M EUR tax payment although only 55M EUR was due over the FY 2019 results. On top of that, Ingenico also received 8.9M EUR in incoming interest and dividend payments so on an adjusted basis, the operating cash flow was 488M EUR. After deducting the 136M EUR spent on investments, Ingenico’s adjusted free cash flow was approximately 352M EUR on a normalized basis. That’s approximately 5.6 EUR per share and clearly higher than the net income as the income statement contained a 12M EUR expense related to share-based payments (which are non-cash charges) and the discrepancy between the 230.5M EUR in depreciation charges and the 136.4M EUR that was effectively spent on capex.

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The buyout by Worldline creates arbitration possibilities

In February, Ingenico announced it had entered into an agreement with Worldline (also trading in Paris with WLN as its ticker symbol) whereby the latter will acquire all of Ingenico’s outstanding shares in a cash and stock deal. As Ingenico decided to pay a 1.20 EUR dividend, the terms have recently been revised. Shareholders of Ingenico will receive:

A) 11 worldline shares and 152.10 EUR in cash per 7 Ingenico shares, B) 109 Worldline shares per 57 Ingenico shares or C) 121.90 EUR per share in cash.

At this point, the 121.90 EUR cash payment appears to be the most interesting one, but as a reminder, Worldline will cut the cash and stock payments proportionally until it meets the maximum cash and stock payment as outlined in Scenario A: 11 Worldline Shares and 152.10 EUR in cash per 7 Ingenico shares. So although it makes sense to request a 100% cash payout right now, odds are you will be cut back and will have to accept a part of the payment in stock.

But this doesn’t necessarily mean it’s a bad deal as it allows you to get a position in Worldline at a discount to the Worldline share price. Using the closing price of Ingenico on Thursday (103.20 EUR), a position of 7 shares of Ingenico would cost an investor 722.40 EUR. If we then deduct the cash portion (152.10 EUR) from this amount, Ingenico shareholders would essentially be paying 570.3 EUR for 11 shares of Worldline, which works out to be 51.85 EUR per share of Worldline. A discount of 8.4% compared to the 56.60 EUR closing price. If anyone owns both Worldline and Ingenico, it could make sense to sell Worldline and tender the Ingenico shares to the Worldline offer to replenish the Worldline position after the acquisition closes.

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Source: company presentation

The merits of the acquisition by Worldline are clear. As I established in this article, Ingenico’s free cash flow performance in 2019 was excellent and even if no growth will be realized in 2020, its free cash flow will remain strong. There are no detailed financials available yet on Worldline, but a press release summarizing its 2019 performance touts a 288M EUR free cash flow result (but there are no additional details on whether this includes working capital changes or not).

The transaction actually is a 1+1=3 story. Considering both companies are very compatible, the expected synergy benefits are enormous: In its acquisition presentation, Worldline estimates the run rate synergy benefits to be approximately 250M EUR per year resulting in a double-digit EPS accretion.

Source: Company presentation

On an after-tax basis, 250M EUR in synergy benefits will have a positive impact of approximately 150-175M EUR which means the pro-forma combined free cash flow performance of 600M EUR in 2019 will increase to 750-775M EUR by 2024 (and this excludes any organic growth in the next 4 years).

Using Scenario A, approximately 97.5 million new shares of Worldline will be created which will bring the total Worldline share count to 278M shares. A free cash flow result of 825M EUR (the mid-point of the pro-forma combined free cash flow including synergies in 2019 and a 2% growth rate per year until 2024) would then result in a free cash flow of about 2.96 EUR per share of Worldline. That’s substantially higher than the 1.58 EUR in FCF it generated in FY 2019 on a standalone basis.

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Source: Company presentation

Investment thesis

The sale to Worldline is a good deal for Ingenico shareholders which are getting a fair price for their shares. And considering the Ingenico share price is trading below the intrinsic value of the offer (based on Thursday’s closing prices), Ingenico shareholders should elect to keep their shares and tender the stock to Worldline using the stock-heavy or cash-heavy option of their choosing, with the caveat there will be a proportional ‘correction’ based on Worldline’s pre-determined maximum amount of shares and cash it would like to spend.

For investors looking to acquire Worldline at a discount, it makes sense to keep a close eye on the potential discount by buying Ingenico stock and subsequently tendering it into the Worldline offer. At the current share price, this means you could acquire Worldline stock at an 8% discount.

I currently have no position in either of both companies but I have Worldline on my wish list.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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