Analysis: Europe's hard-pressed payment firms face investor exodus

Wirecard AG

26/10/2023 15:37

By Elizabeth Howcroft
       LONDON, Oct 26 (Reuters) - A bleak economic outlook and
tougher regulatory scrutiny are proving a final straw for
investors in European payments company stocks, with signs some
are giving up on the industry.
    Sector valuations, which ballooned during the COVID-19
pandemic as the market for digital financial services boomed,
have since slumped as markets have re-appraised their outlook.
    The latest selling bout saw Worldline's shares drop by 59.2%
on Wednesday after the French payments firm posted below
expectation third-quarter revenue, cut its full-year targets and
said it was dropping some merchants to reduce crime risks.
    In a wild week for the sector, Worldline's warning sparked a
further sell-off, with competitors such as Italy's Nexi
 NEXII.MI  and London-listed CAB Payments  CABP.L  also hit.
    "It's clearly investors giving up," said Paul Charpentier,
equity research analyst at Bryan Garnier, referring to
Worldline's sharp drop, which he said showed they had "lost
patience" with the company.
    Worldline, whose shares were up 6% on Thursday, did not
immediately respond to a Reuters request for comment on the
stock price decline, but had said in a statement on Wednesday
that the environment was "temporarily challenging".
    U.S. stocks, already hit hard by 2022's tech stock rout,
have suffered too, with Wednesday's wipe-out seeing some
spillover into firms such as PayPal  PYPL.O , Upstart Holdings
 UPST.O , Block  SQ.N  and Affirm Holdings  AFRM.O .
    Worldline's  WLN.PA  stock slide, which saw around $4
billion wiped off its market value, is the latest wake-up call.
    Investors had already seen Adyen's  ADYEN.AS  market value,
which peaked at 84.2 billion euros ($89 billion) in 2021,
plummet by around 18 billion euros in a single day in August
after weak earnings.  
    
    COMMISSIONS CUT
    Revenue growth has suffered at payments firms as inflation
has force European consumers to spend less, while investors fret
about the euro zone slipping into recession.
    Some analysts say payments firms have also been caught
napping, after a period of growth during COVID lockdowns.
    "Companies have been too slow to adapt to the post-pandemic
normalization," Jefferies equity analyst Hannes Leitner said.
    "A lot of the trends seen in the pandemic ... those trends
are not as sustainable as everybody thought," Leitner added.
    Another factor piling pressure on valuations is competition
from newer entrants such as Stripe, Block and SumUp, which
Charpentier said can more easily cut their commission to gain or
retain market share, as well as from more established rivals.
    "The market is probably currently pricing a vicious cycle
where you have prices going down," he said.
    In a further sign of investor wariness, venture capital
investment flows into European payment firms have also dried up.
    They fell to $2.4 billion in 2022, down from $3.8 billion in
2021, PitchBook data shows and with two months left until the
end of the year, 2023 has seen just $542 million.
    Several banks have also turned cautious on their payments
exposures, with Barclays exploring the sale of a stake in its
British payments arm, Reuters reported in September.
    Italy's Intesa Sanpaolo said last year it was selling its
5.1% stake in Nexi and Spain's Banco Sabadell agreed to sell its
payments business earlier this year.
    
    'SENSITIVITY'
    Payments firms in Europe have been under intense scrutiny
since the 2020 collapse of Wirecard, which has resulted in what
Leitner said was an "increased sensitivity".
    Last month, Germany's financial regulator said it had banned
a Worldline joint venture from doing transactions for some
customers, citing in a statement on its website "grave
deficiencies in money laundering prevention".
    "We think this development has left outstanding questions
and concerns amongst investors," Morgan Stanley analysts said in
a note on Wednesday.
    A spokesperson for Worldline said in an email that the
company is committed to "integrity and compliance" and wants to
"anticipate payment industry threshold and regulatory trends".
    "We are regularly audited by regulators and have never been
subject to compliance fines," the spokesperson said.
    Worldline said on Wednesday it was cutting ties with
merchants worth up to 130 million euros in run-rate revenues in
response to the increased costs of monitoring them for
cybercrime and the due diligence.

    'PICKY'
    While large-scale market consolidation had previously driven
interest in the sector, this has been slowing in recent
quarters, Bryan Garnier's Charpentier said.
    "Investors are becoming a bit more picky," he added.
    Berenberg analysts said in a note that while Worldline has
M&A opportunities that will help it expand its geographic
coverage and improve its ability to serve merchants in Europe, a
key risk is that it could "acquire low-quality companies that
dilute its growth and margin expansion potential".
    A $17.6 billion write-down this year by U.S. banking and
payments processing conglomerate Fidelity National Information
Services  FIS.N  on its $43 billion acquisition of card payments
provider Worldpay in 2019 has also left scars on the sector.
    Now, it may leave private equity investors to pick up the
pieces for payment service firms, analysts said. 
    A potential deal targeting Nexi is one of several options
being studied by CVC Capital Partners, but the private equity
firm is not preparing to file an offer, a source close to CVC
told Reuters last week.
    
    
($1 = 0.9482 euros)

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Payment firms in 2023    https://tmsnrt.rs/474zrQ7
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 (Reporting by Elizabeth Howcroft; Editing by Alexander Smith)
 ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))