The consolidating impact of the pandemic on the global payments sector is finally being felt. After a dearth of M&A deals in the money transfer and cross-border payments space, two significant deals have come thick and fast sweeping up two sizable independent players.
In August, WorldRemit, one of the leading remittances Fintechs announced its plans to acquire Sendwave, an African mobile money transfer player. And this month, FLEETCOR, owner of B2B cross-border payments player Cambridge Global Payments, announced it was acquiring one of the oldest independent groups in the space – Associated Foreign Exchange (AFEX). Why have these two deals happened now?
Unfortunately, WorldRemit is not yet able to talk publicly about the deal but we were able to talk with John Coughlin, President of Corporate Payments at FLEETCOR, the division that owns Cambridge and that will buy AFEX.
Valuations and growth cycles that match
We broadly define two groups of companies in the global payments sector. The leading incumbents – for example, Western Union
WorldRemit (formed in 2010) and Sendwave (2011 ) are both challengers. They have both been growing at triple and high double digit rates. Their valuations, whilst not at the level of a TransferWise or Revolut (other money transfer focused Fintechs), are still very strong and approximately five times revenues. The growth curves matched and the strategies matched. That made a deal possible.
In the B2B world, Cambridge Global Payments (formed in 1992) and AFEX (1979) have been growing at a similar double digit pace per year for the last few years. In effect, a larger leading incumbent (owned by FLETTCOR which was founded in 2000) buying a smaller incumbent. Let’s look at each deal in turn.
WorldRemit’s acquisition of Sendwave
The remittance segment of the money transfer sector remains highly fragmented. The leading player, Western Union, has around 13% of the market (according to the World Bank market size definition). After that, the next two biggest players, MoneyGram and Ria have around 3-4% each. As much as consolidation would make sense (the scale economies and many synergies are covered in one of our previous articles here ), few deals have actually happened.
The largest deal in the consumer money transfer space to date was PayPal’s acquisition of Xoom back in 2015 for $890m. Due to the relative size of PayPal (now valued at c. $220bn), Xoom no longer moves the needle enough with PayPal to receive any standalone reporting in PayPal’s public financials. It took a while for Xoom to emerge within PayPal but over the last few years, it has expanded its coverage and offering and Xoom has benefited significantly from the shift to digital driven by the pandemic.
In WorldRemit’s acquisition of Sendwave (expected to close in the fourth quarter of 2020), WorldRemit is able to consolidate its position in the fast growing digital remittance market into Africa. Sendwave is one of the few companies that has reached scale (enough to be valued at c.$500m) focusing on just a small number of corridors, mostly from the US to a select set of African markets.
WorldRemit can be expected to benefit from the acquisition in a number of ways. It will gain additional scale from the combined group’s rolling 12 month revenues of $280m as of June 30, 2020 and $7.5bn of FX principal flows. No other player outside of the incumbents of Western Union, MoneyGram and to a lesser extent Ria have built up this much scale into Africa. Although WorldRemit covers 6,500 corridors, as with all players, their flow across these corridors is not equal. Sendwave has also very effectively targeted and retained the mobile money focused customer. That skillset can be shared across the broader WorldRemit set of corridors. We would not be surprised if WorldRemit further consolidated its position over time, now that it has made its first major acquisition.
FLEETCOR’s acquisition of AFEX
Turning to the B2B space, FLEETCOR, a $20bn S&P 500 listed traditional provider of card products for businesses and fleets, bought Cambridge Global Payments in 2017 for $690m. FLEETCOR had to that point only focused on domestic corporate payments and the Cambridge acquisition provided it with a clear product extension to offer to the same CFOs and treasurers that both its domestic payments team and Cambridge’s cross-border payments team were speaking to.
At the time, the price FLEETCOR paid seemed high compared to what others were willing to pay. Credit to FLEETCOR, it has managed to drive both top line growth and cost savings out of the business, and save for a blip in Q1 2020 caused by a big hedging loss, it has navigated the business well. Although not formally broken out in the public reporting, FXC Intelligence estimates Cambridge’s 2019 revenue to be c.$200m.
FLEETCOR’s success in driving more growth and margin from the Cambridge business placed it in a strong position to acquire AFEX. Whilst we know many strategic players and private equity groups looked at AFEX, FLEETCOR’s recent success with Cambridge and the obvious synergies it could squeeze out would have enabled it to pay the best price. FLEETCOR is also an M&A integration specialist with around 80 acquisitions under its belt and is set up to execute bolt-on transactions.
AFEX is a good fit for FLEETCOR. First and foremost it brings additional scale to the FLEETCOR’s cross-border payments business. We understand that the AFEX business is about half the size of Cambridge meaning together, their combined 2020 revenue is likely to exceed $300m putting them firmly as the number two player by revenue behind Western Union Business Solutions. AFEX’s geographic focus is complementary to Cambridge bringing additional scale in Europe and the Asia Pacific region. The core hedging and API products overlap, although AFEX’s customer base skews to slightly smaller corporates than Cambridge. AFEX will likely be integrated with Cambridge and then within the broader Corporate Payments group at FLEETCOR, expect one brand (potentially a new name) to emerge.
Who else could have bought AFEX? Whilst Western Union Business Solutions is the leading player by revenue in the market with c.$400m of annual revenue, the B2B division accounts for less than 10% of Western Union’s overall revenues. Although Western Union’s CEO has recently stated he is looking for acquisitions, few would expect these to come in the B2B space. Two years ago, the B2B division was reported to be up for sale (having written down the value of its previous acquisitions in the B2B space) and though growth has returned to the division, the focus for Western Union now is on driving the digital part of the consumer business, building out the Western Union platform and pushing efficiency gains. Other private equity players looked at AFEX but even for those who already own businesses in the space, none would have the potential synergies or the product overlap that Cambridge has with AFEX.
FLEETCOR is now well positioned to add further acquisitions to its global payments offering, not instantly, but whenever the right opportunities arise. What’s a good fit for FLEETCOR according to John Coughlin: companies that can scale, accelerate growth or add product capability. FLEETCOR’s overall goal is to double the operating profit of an acquisition within four years, either by revenue growth and / or synergies.
What’s next for the global payments sector?
Consolidation has been slow in the sector as our tables of the recent deals above show. The pandemic has presented new opportunities as some companies struggle (and become acquisition targets) and some companies thrive and are able to supercharge their growth with an acquisition (WorldRemit is a good example).
The consumer segment of cross-border payments is divided between a number of leading incumbents (Western Union, MoneyGram and Ria) and plenty of fast growing fintechs (e.g. Remitly, WorldRemit and TransferWise). Whilst the rumor of a potential tie-up with Western Union and MoneyGram has not been quashed, it would be hard to see deals happening between an incumbent and a challenger. That means any further consolidation is likely to be driven by one incumbent buying another incumbent or one challenger buying another challenger.
The B2B side of cross-border payments is much more fragmented than the consumer side. Additionally, banks are still significantly more dominant as the primary service provider to corporate customers. That market fragmentation provides plenty of scope for players to join together and add scale and capability. All this has meant the B2B market has been more active in recent years on the acquisition front and we expect to continue to see that happen.
Who could make the big moves? Western Union has publicly stated they are looking for acquisitions. PayPal has continued to be active in the space – Xoom and Hyperwallet are two meaningful acquisitions made in the cross-border space in the last five years. Visa