I wrote about a SPAC (special purpose acquisition company) called Foley Transimene Acquisition Corp II (NYSE:BFT) on Jan. 6. I thought BFT stock (to be renamed PSFE after the merger closes) was worth 40% more or $21.14.
But now, the closer I look at the deal I think BFT stock/PSFE stock is worth even more. It could easily be worth $25.42 per share, or 64.8% higher than the Jan. 29 price of $15.42.
Why? Very simple. It is going to be even more profitable than I calculated the first time.
Green Shades on the Paysafe Deal
Paysafe is extremely profitable. It expects to make $420 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) on $1.38 billion in revenue in 2020. This is based on pages 25 and 26 of its slide presentation. That works out to an EBITDA margin of 30.4%. That is amazingly high.
But here is the thing. Its EBITDA margin is forecast to rise significantly by 2033. Its projections show $744 million in adjusted EBITDA on 2023 revenue of $1.881 billion. That represents an EBITDA margin of 39.55%. In other words, in three years its margins will rise from 30% to 40%.
That deserves a much higher multiple than I first assumed. My first analysis in the Jan. 6 article used a 27 times multiple. But its comps have higher multiples as much as 35 times.
At that multiple, Paysafe is worth 64.8% more at $25.42 per share. The math is a little complicated and I think if I went through it the effect would be lost. Suffice it to say that Paysafe is likely worth much more than I originally thought.
Paysafe’s High Take Rates
Nevertheless, I find Paysafe to be a very interesting financial company. In my last article, I talked about its take rate. This is the rate at which it charges fees on it total gaming dollar volume.
This is what drives its revenue. For example, Paysafe handles the gaming dollar volume for the very popular online game Fortnite and also Twitch, which is owned by Amazon (NASDAQ:AMZN). It also handles online gaming revenue payments for DraftKings (NASDAQ:DKNG), bet365, William Hill and betfair.
In fact, Paysafe makes a big point that its take rate is very high at roughly 1.56% in 2020. This is not as high as the take rate at PayPal (NASDAQ:PYPL). PayPal consistently generates take rates in the low 2% range, as I discussed in my article on Dec. 17.
However, PayPal is nowhere near as profitable as Paysafe. The company produced $4 billion in EBITDA for the last 12 months to September, according to Seeking Alpha. But revenue was $20.299 billion. Therefore its EBITDA margin was just 20%. (PayPal has not yet released its full-year 2020 results, but I expect the margin will be similar.)
But I showed above that Paysafe is expected to make 30.4% this year and as much as 39.6% by 2023.
Therefore, BFT stock (PSFE stock) deserves to have a higher EV-to-EBITDA margin of 35 times. This is the multiple page 48 of the slide presentation shows three of its large peers have.
What to Do With BFT Stock
Based on this analysis it looks like BFT is worth a look by most patient value investors. I believe that investors will want to make sure that Paysafe actually produces the results that it projects in its slide presentation.
Therefore, depending on when the deal closes, and if Paysafe releases its 2020 results before then, investors should wait for those results. But if it looks like the presentation, and if the company upholds its forecasts going forward, Paysafe is going to be very profitable.
I suspect then that investors will want to average cost into purchases of BFT stock (PSFE stock) both before and after its merger close. That is, if they believe that this company is worth investing in, this SPAC deal will likely be worth significantly more than its price today.
On the date of publication, Mark R. Hake did not hold a long or short position (either directly or indirectly) in any of the stocks in this article.