IPO Launch: Shift4 Payments Prepares Final Terms For IPO

IPOStreet

Shift4 Payments (FOUR) intends to raise a combined $400 million in an IPO and concurrent private placement.

The company provides integrated payment processing and related gateway, merchant acquisition and POS solutions.

FOUR is generating impressive revenue growth and turning toward net breakeven and producing free cash flow while operating in an industry with very positive growth trends, so my opinion on the IPO is a BUY at up to $20.00 per share.

BUY

Allentown, Pennsylvania-based Shift4 was founded to create an integrated payments platform serving businesses located primarily in the United States.

Management is led by founder and Chief Executive Officer Jared Isaacman, who was previously founder of Draken International, an air services provider.

Below is a brief overview video of an interview with CEO Isaacman:

Source: pinnaclehs

The company’s primary offerings include:

  • End-to-end payment processing
  • Merchant acquisition
  • Omni-channel gateway
  • 350 integrations
  • Fixed and mobile POS solutions
  • Security and risk management tools
  • Reporting and analytics

Shift4 has received at least $148 million from investors including private equity firm Searchlight Capital Partners.

FOUR acquires customers solely through a partner distribution system.

The firm sells through well-developed partner programs of ISVs (Independent Software Vendors) and VARs (Value Added Resellers); it served 66,000 merchants during the first quarter of 2020.

Advertising & Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Advertising & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Advertising & Marketing spend, was a very high 34.2x in the most recent reporting period.

According to a 2019 market research report, the market for payment processing services is expected to reach $62.3 billion by 2024.

This represents a forecast CAGR of 9.9% from 2019 to 2024.

The main drivers for this expected growth are a continued growth in the number of merchants seeking integrated payment processing solutions and the entrance of new market participants with new technology offerings.

Major competitive vendors include:

  • PayPal
  • Global Payments
  • Square
  • Wirecard
  • Visa
  • Jack Henry & Associates
  • Paysafe Group
  • Naspers Limited

Management says its system not only provides payment processing but integrates with a large number of third party 'commerce enabling' software to offer a more seamless set of solutions.

Shift4’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Stable gross profit but decreasing gross margin
  • A swing to operating profit
  • Positive cash flow from operations

Below are the firm’s recent operational results and balance sheet information:

fourpl
Source: Shift4 Payments S-1/A

As of March 31, 2020, Shift4 had $70.2 million in cash and $833.2 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was $18.4 million.

FOUR intends to sell 15 million shares of Class A stock at a midpoint price of $20.00 per share for gross proceeds of approximately $300 million, not including the sale of customary underwriter options.

Rook Holdings, an entity controlled by the company founder and CEO, has indicated an interest to purchase shares of up to $100.0 million in a concurrent private placement at a price equal to the public offering price. This is a positive signal of ‘support’ for the IPO by the founder and CEO.

Class A shareholders will be entitled to one vote per share, and the Class B shareholders, private equity firm Searchlight Capital and company founder and CEO Isaacman, will be entitled to ten votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $2.2 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 18.65%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds to repay existing indebtedness in an amount up to approximately $285 million.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Citigroup, Credit Suisse, Goldman Sachs,BofA Securities, Morgan Stanley, RBC Capital Markets, Evercore ISI, Raymond James, SunTrust Robinson Humphrey, Wolfe Capital Markets And Advisory, Citizens Capital Markets, Scotiabank, TD Securities and Telsey Advisory Group.

Commentary

FOUR is seeking public investment to pay down debt.

This is typical for a private equity-owned company at IPO and a negative since the IPO’s proceeds won’t be available for unencumbered expansion plans.

The firm’s financials indicate a company that is growing revenue quickly, has swung to positive operating income and is producing cash flow from operations as well as free cash flow.

Sales and marketing expenses as a percentage of revenue are tiny as the firm acquires customers through third party relationships.

The market opportunity for an integrated payment provider in the United States is large but competitive.

Citigroup is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (24.9%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

As a comparable-based valuation, the IPO appears reasonably priced versus the price for GPN’s shares, although the two firms are different in scope and growth rate.

The founder and CEO’s plan to purchase $100 million of company stock in a concurrent private placement is a strong and unusual signal of commitment to the firm and its valuation.

Even though it is using the IPO proceeds to pay down debt, FOUR is not your typical private equity-owned IPO candidate.

The company is growing reasonably quickly, the IPO appears reasonably priced and the founder and CEO is increasing his ownership as a vote of confidence in its prospects.

Given the effects of the Covid19 pandemic, my expectation is that the digital payments industry will produce higher than expected growth rates in the years ahead, as consumers in the U.S. switch to online ordering at an increasing rate.

FOUR is well positioned to reap the benefits of this accelerating trend to online payment processing.

Since the firm is producing strong growth and other financial metrics, is turning toward net breakeven and producing free cash flow while operating in an industry with very favorable growth trends, my opinion on the IPO is a BUY at up to $20.00 per share.

BUY

Expected IPO Pricing Date: June 4, 2020.

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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