In early February, InvestorPlace’s Vince Martin discussed the upcoming merger between special purpose acquisition company (SPAC), Foley Trasimene Acquisition Corp. II (NYSE:BFT), and UK-based payments platform Paysafe. While it looked good then, it might be time to get out of BFT stock.
Martin generally had good things to say about Bill Foley, the man behind BFT and Fidelity National Financial (NYSE:FNF), the company Foley acquired in a $3 million leveraged buyout in 1984 and built into a financial services powerhouse.
The dealmaker, Martin reckons, has the industry understanding to take Paysafe to the next level. Ultimately, despite trading at 20x its 2022 projected earnings before interest, taxes, depreciation and amortization (EBITDA), he likes the fit between jockey and horse.
When I wrote about Foley Trasimene in January, I suggested that BFT stock wouldn’t double overnight. Rather, it would take 2-3 years because Paysafe wasn’t a sure thing.
The way I see it, private equity firms Blackstone Group (NYSE:BX) and CVC Capital are wise to sell at 20x EBITDA.
It’s Not Permanent Capital
According to Barron’s, Blackstone and CVC are expected to make three times their original 2017 investment. That’s based on the private equity firms paying $3.9 billion for Paysafe.
In April 2020, the median holding period for private equity firms was 5.43. That was up from the median of 5.17 at the midpoint in the three years between 2015 and 2018.
With all the SPAC money sloshing around, I would guess that the median holding period will decline in 2021 and 2022 as the novel coronavirus becomes less of an issue for businesses.
According to the Real Economy Blog, private equity firms in the first four months of 2020 had an investment-to-exit ratio of 5.2x, a level it hasn’t seen in more than 10 years.
With fewer favorable exits in early 2020, private equity general partners were willing to put the traditional three-to-five-year-hold on pause, opting to wait for better times. While I do think those times will come later in 2021 and into 2022, Blackstone and CVC are taking their money now.
They’re Still Rolling Equity into BFT Stock
As part of the Paysafe acquisition in 2017, the two private equity firms assumed approximately $1 billion in net debt, which put the enterprise value at $4.7 billion.
If they paid 40% of the $3.7 billion acquisition price with debt, that means they invested $2.2 billion collectively of their capital to buy Paysafe. Fast forward to 2021.
The $9 billion pro forma enterprise value includes $7.2 billion in equity and $1.8 billion in net debt. That’s after $1.1 billion in debt repayment.
As for Paysafe’s owners, they’re getting $2.3 billion in cash from the merger. Much of this cash comes from the $2 billion private investment in public equity (PIPE) that’s concurrent with the closing. This puts Blackstone and CVC approximately $100 million in the black ($2.3 billion in cash minus $2.2 billion estimated investment in Paysafe) plus $3.3 billion in equity they’re rolling over.
Based on $10 per share, the Paysafe shareholders will own 330 million shares of the merged company, good for 45.7% ownership. Blackstone and CVC have agreed not to transfer any shares for 180 days. However, if its share price trades above $12 for 20 consecutive days of trading post-closing in a 30 day period, 60 days later, they can start selling shares.
So, technically, the lock-up period could end within 90 days of closing. Given it’s trading around $16 now and is expected to go up on closing, the lock-up period is almost certain to be shorter than 180 days.
On Feb. 3, InvestorPlace’s Mark Hake suggested that BFT stock could be worth $25.42 based on estimated 2020 revenue and EBITDA of $1.38 billion and $420 million, respectively. With 722 million shares post-combination, Hake’s estimated value of BFT shares puts Paysafe’s market value at $18.4 billion.
Blackstone and CVC’s shares would be worth $8.4 billion. Add that to the $100 million return after the cash it received as part of the transaction, and their return equals almost three times the estimated gain Barron’s reported.
For this reason, despite my colleague’s assertion that Paysafe is very profitable, I too would find it hard not to sell at 20x EBITDA.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.