Worldpay’s IPO Will Severely Test Market Appetite

Worldpay confirmed today that it intends to raise net proceeds from a public offering of about “£890m, in order to reduce leverage to 3.75x net debt/Ebitda (as of 30 June 2015).

Its forward net leverage is pretty high. Pre-IPO, even assuming £400m of Ebitda for 2015, net debt/Ebitda would stand at 5.75x, on a pro-forma basis, but it could be as high as 6.1x. In fact, based on the numbers that the group provided us, it should report Ebitda in the region of £376m for the year (2014 Ebitda: £375m).

Valuation

Worldpay will try to float a stake of between 20% and 30% (it “expects to have a free float (…) of at least 25%“), which would imply a valuation of between £3bn and £4.5bn for its equity. Add back net debt of £2.3bn (the amount of net debt that the group had on its books at the end of June), and its enterprise value (EV) would range between £5.3bn and £6.8bn.

WORDPAY

Based on Ebitda of £182m for the six months ended 30 June, and assuming a steeper growth rate in the second half of the year, Wordplay will record a full-year Ebitda of about £400m, which would determine a forward EV/Ebitda multiple range of between 13.2x and 17x.

Ebitda might be about 6% lower, though.

Risk

In spite of a strong growth trajectory for revenues, the high end of that range is way too high, based on fundamentals.

Losses are narrowing, but its Ebitda margin has not grown year on year, and currently stands at 9.3%. While it’s true that its free cash flow has moved into positive territory, at £20m in 1H15 it is essentially very close to break-even — and its net debt has risen to £2.29bn from £2.15bn one year earlier.

Hence, its private equity owners are looking to offload part of the execution risk onto the market.

As usual, we have also performed a preliminary SEO audit of Worldpay’s website, and our findings will be released on Monday.

(Alessandro Pasetti and Hedging Beta are not invested in any of the companies mentioned in this article.)

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