Is Visa’s Second Bid for Earthport Too High?
While the second offer is being evaluated by Earthport’s shareholders, Visa (NYSE:V) has received acceptance of 268 million shares, representing around 41% of the share capital. The offer will be considered as accepted when Bidco (a wholly owned subsidiary of Visa, Inc) receives 75% of the voting rights of the Earthport shares. In our previous article What Does Visa Stand to Gain by Acquiring Earthport? we discussed Earthport’s value proposition and the benefit to Visa, according to Trefis analysis.
Below we discuss the fair price of Earthport and the impact Earthport’s inclusion could have on Visa’s stock. You can view our interactive dashboard Is Visa’s 37 p/share Bid For Earthport Too High? to modify key forecasts and gauge the impact on Visa’s acquisition price, and see more of our Financial Services data here.
Is Visa’s 37 p/share bid for Earthport too High?
Earthport’s management had an aggressive five-year plan to take the number of processed transactions from 6.7 million in 2016 to around 50 million by 2021, probably to boost investor sentiment against declining share price in 2016. Considering the two operational parameters, the number of processed transactions and payments volume were growing at more than the 50% level year-on-year till 2017. The company’s management had similar expectations for the upcoming years but, the loss of a big e-commerce client and project delays in 2018 lowered these operational parameters below 2017 levels. The total revenues remained almost flat, growing at about 5%. As a result, Earthport’s directors revised the guidance figures to modest levels and brought about changes to the company’s leadership.
Considering the historical figures for total revenue and share price, Earthport’s price to sales ratio tanked from 15.12 in 2014 to 1.86 in 2018. The price to sales ratio currently is 7.10, pumped by Visa’s acquisition deal. In our dashboard we have created a scenario where Earthport’s revenues are increased by 50% and price to sales ratio remains the same in 2019, the share price then becomes 60 p/share, valuing Earthport to around $500 million. Comparing this valuation with the approximate figures from our previous article, both are higher than Visa’s second bid and therefore we believe that Visa stands to gain more from this deal. On the other hand, Earthport’s shareholders get the returns they would have realized in 2015, overcoming the operational inefficiencies of recent years.
What could be the impact of Earthport’s inclusion on Visa’s stock?
Earthport caters to the cross-border payment processing market and would add value to the international transaction segment of Visa. Visa’s international transaction revenues were $7.2 billion in 2018 and Earthport’s annual revenue of $42 million would increase Visa’s international transaction revenues by just 0.5%.
Earthport’s technology proposes a low-cost solution for cross border value transfer. Considering a scenario where this technology increases Visa’s net-income margin by 5%, the company’s share price is boosted from our current estimate by 10% to $162 per share.
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