Investors in VeriFone Systems Inc (NYSE:PAY) have had a difficult couple of years. PAY stock has only paid short-sellers over the majority of the past decade. In 2011, VeriFone Systems stock was worth as much as $55 per share. Earlier this year, it hit $15. That represents a tremendous loss of value for PAY stock during a raging bull market.
Fortunately for shareholders, it appears the pain has ended. A private equity firm called Francisco Partners has decided to buy up VeriFone Systems for $23.04 per share of cash.
How PAY Stock Ended Up in Such a Mess
Why was VeriFone Systems stock such a loser over the past seven years? Investors had previously gotten excited because it appeared that VeriFone had several long-term tailwinds to power the business forward.
First and foremost of these would be that emerging markets would accelerate their conversion from cash- to credit-based economies. In doing so, thousands of small merchants would need to order point-of-sale machines from the likes of VeriFone. Alas, several things went wrong with this thesis. Emerging markets haven’t migrated to cash as quickly as some expected. A strengthening American dollar hit the value of sales derived from emerging markets. And perhaps most importantly, chief rival Ingenico/ADR (OTCMKTS:INGIY) took substantial market share.
On top of that, investors expected a big bump in demand for new point-of-sale terminals to take advantage of new chipped cards. However, merchants didn’t adopt this technology as quickly as expected.
Finally, the rise of Uber greatly cut demand from the taxi industry for in-vehicle point-of-sale terminals. Add it all up, and PAY stock has floundered.
It’s not just VeriFone either. With a 2015 initial public offering, CPI Card Group Inc (NASDAQ:PMTS) has lost 90% of its value since its debut. The rise of new entrants, such as Square Inc (NYSE:SQ) has also hurt. So combine some industry issues and execution problems and it has all led to PAY stock getting crushed.
PAY Stock’s Buyout
Earlier this week, Francisco Partners, along with British Columbia Investment Management, agreed to buy PAY stock out entirely at $23.04/share. That represents a 50% pop for PAY stock from where it had been trading previously. For anyone who purchased Verifone in 2017, you’re now well in the green on that investment. But longer-term shareholders have to be disappointed. Prior to 2016, PAY stock rarely traded under the $23-per-share level, leaving many investors with sizable losses, even after the takeout premium.
This sort of thing is a risk in owning a deeply-underwater stock. Private equity shops are always on the lookout for undervalued companies. If the market turns too bearish on something, the next thing you know, it’s taken private and you don’t have a chance to recoup losses. Is that what’s happening here?
PAY Stock Offer: Is the Price Too Low?
Is Francisco Partners sweeping in and stealing the company on the cheap? Analysts see forward earnings at $1.73 per share, meaning the stock was trading at less than 9x earnings last week. Even at $23 per share, the price-earnings ratio still clocks in at an enticing 13.3x. That said, VeriFone is recovering from a sizable loss in 2017 — it’s worth taking analysts’ estimates with a grain of salt in a turnaround scenario. Even then, analysts in aggregate had just a $20.60 price target for PAY stock — so anyone selling today is getting a decent premium to that target price.
Also, notably, short-sellers were hounding VeriFone Systems stock. As of the most recent data, short-sellers had sold almost 12% of PAY stock short. That’s a large bet on Verifone continuing to flounder. Clearly, a not-insignificant portion of the market thought that VeriFone would struggle further and not meet analyst expectations.
VeriFone faces a challenging industry environment. Their products are increasingly commoditized, the emerging markets tailwind failed to play out as expected, and new Fintech competition is springing up from every corner. Sure, PAY stock looks cheap optically, but there are plenty of reasons why it might continue to underwhelm as a standalone entity.
Verdict on PAY Stock
In theory, there’s a chance of a higher bid for PAY stock. The company has a go-shop period to look for higher bids through May 24. However, the buyer is fully financed, and offering a large enough premium that most shareholders will probably be inclined to take the deal. For what it’s worth, the VeriFone board approved the deal without dissent and urges shareholders to vote in favor.
Analysts agree with the board. Jason Deleeuw of Piper Jaffray says it is a good deal for the company, and that a higher bid is unlikely. Jeffries weighed in as well, suggesting that there is unlikely to be other bidders, given the rapid rate of disruption in the payments industry.
And that’s just the thing. PAY stock looks cheap, but the company has failed to deliver for many years now. Shareholders are fed up, and likely to take the guaranteed cash from the private equity shop. Given that the stock was at $22.75 on Tuesday, there is only 1% upside in holding until the deal is slated to close in the third quarter. And since a higher bid is unlikely, that really leaves little reason to own PAY stock.
It’s a good time to consider taking advantage of the buyout offer and cashing out.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.