Worldline - Almost there - Initiation
All,
Please find our initiation of Worldline here.
The Wirecard scandal sits deep in everyone’s mind, even if unspoken of in this context; despite negative press and widespread investigations, it is probably a far cry from Worldline’s reality today. Still, Worldline is the opposite of what we are usually looking for: a bad company with a good balance sheet. The fundamentals are stable, but at too low a level now and modelling growth in the near term is hard to justify. Quality, instead, comes from its vast RCF and cash balance that should keep investors safe for a long time. So unless there is actual large-scale fraud involved - we have not heard the allegation made to the company - it’ll remain a yield play, and we think we are almost there on the price.
Investment Considerations:
- When the price settles (still falling), we are ready to dip our toes in Worldline with a 3% of NAV position in the lowest bonds then (long end). With €2.5bn of liquidity, of which €1,5bn excess and proceeds from the MeTS & DA business, the company can refinance its three short-term bonds and buy time through 2029. But we think of this credit as very binary. If there is fraud, the curve will flatten over night. If some months go by and clients stay on board, then yields will tighten. We are constructive.
- Admittedly, it's a bet on the capital structure rather than great fundamentals. Worldline is a bad business with a good balance sheet. Within the growing payments industry, Worldline is in the slow growing verticals and saddled with legacy systems and 2x as many employees as its more nimble rivals (Ayden) would need to do the business. Faced with regulatory and competitive margin pressures, the business should go sideways for the next two years, but thanks to its enormous RCF, its cost of debt should remain artificially low.
- Business metrics should have another half year to annualise at these lower levels, which management have guided for, and we don't anticipate much growth in 2026, while the cost savings program Power24 will likely evaporate in this business climate. There is upside if Worldline recommence business with the large client who recently re-insourced their business, but the margin might not return.
- Worldline will remain a yield name for some time. On the downside, we see 12% and 15% as typical stops, providing us between -3 and -8 points of risk (up to 10% of the position), while on the upside, better growth, noticeable cost saving, and a return of lost business once the negative press subsides should bring the bonds back into the 90s.
Key Conclusions:
- Worldline’s current trading shows stabilisation in both segments, but growth is slowing and margins are systemically under pressure, reflecting negative press and operational challenges, as well as the power balance in the industry. The divestments of MeTS and Digital Assets could realise €410m EV, though full cash conversion is unlikely (Current Trading).
- Management is pursuing cost efficiencies, but margins are constrained by regulation, rising network fees and the lost profitability of recently re-insourced operations, which appeared to carry high-margin business (Current Trading; Model).
- Medium-term growth is expected to lag historical assumptions, with potential market share erosion to faster-growing, tech-enabled competitors (Model).
- Cheap short-term debt cushions financial stress, as interest coverage would fall more sharply in the next two years if it weren't for the RCF. Only when adding debt carrying capacity, the high cash balance and the EV of the MeTS and Digital Assets business is the debt just about sustainable - if the cash is used to pay down debt, and quickly (Model; DCF).
- The payments industry is undergoing a technology-driven shift: New tech-based players in high-volume and high-value verticals benefit from higher growth and margins, while incumbents like Worldline occupy a defensive, legacy-system consolidation role, which is inherently less valuable due to lower margins and lower growth rates (Industry).
- Margin compression arises from both network duopoly power and PayFac intermediaries. The former continuously raise transaction fees, while the latter intermediate traditional acquirers from their merchant customers with more efficient merchant onboarding processes (Industry).
- Worldline remains an amalgamation of complex legacy carve-outs with slow growth dynamics, stabilised following scandals around compliance and fraud prevention, but saddled with expensive operations exposed to regulatory scrutiny (Company).
Summary:
- Worldline SA is a French payment services provider headquartered in Paris. Established in 1972 as a subsidiary of Crédit Lyonnais, it became independent in 2019 following a spin-off from Atos. As of 2025, Worldline employs approximately 18,000 people offering a comprehensive range of payment solutions grouped into three divisions: Merchant Services (80% of EBITDA - facing merchants), Financial Services (20% of EBITDA - facing financial institutions) and the smaller MeTS and Digital Assets business that it has agreed to sell next year. Its business model encompasses payment processing, acquiring, and issuing services, catering to sectors such as retail, banking, and transportation. Worldline's 50 country (mostly) European presence centers on France, Germany, and the Benelux region.
- Strategically, Worldline has pursued growth through acquisitions, notably merging with Dutch/German Equens in 2015 and acquiring Swiss SIX Payment Services in 2018. In 2020, it gained scale through the acquisition of French Ingenico, a leader in payment terminals, further consolidating its position in the global payments landscape, but sold much of its operations two years later to Apollo. These expansions have aimed to enhance its technological capabilities and market reach, positioning Worldline as a significant player in the global payments industry.
- Apparently, size is not everything, however. The emergence of leaner tech-enabled solutions, along with margin pressure from networks and regulatory scrutiny, have curbed Worldline's growth profile.
- Scandals of worldline failing to offload questionable merchants and lacking in compliance have recently led to re-insourcing of business by one large client and overall to client churn. The company has had to agree a large goodwill write-off, and now that the business is stabilising, the outlook is far less exciting than it used to be - requiring an adjustment of its capital structure.
Key Value Drivers:
- Cost rationalisation from Power24 and beyond while revenues stabilise. We have not modelled significant increases from Power24, but rather assume it will stabilise margins here. There is upside.
- The Large cash balance shows strength while fundamentals are uncertain. However, we think the business needs to return much of it and the MeTS proceeds to creditors to achieve an A&E.
- Recovery in consumer spending: Worldline's home market is not growing. We have modelled some 2-3% growth in the future, largely based on the expectation of economic recovery in France.
- New board and a CFO with a background in risk management and audit to address recent allegations of money laundering and compliance lapses.
Key Risks:
- Restructuring: The company benefits from very low interest rates on convertible and 2027 bonds that will not be replicable at maturity. The cash war chest should be enough to reorganise under the IG bond documentation, which is entirely open to abuse via LME or a coercive A&E. However, the company is public and has no sponsor to drive aggressively.
- Potentially continued customer churn beyond mere annualisation of bad press. MSV (Merchant Service Value acquired) could remain weak on other issues, such as technologically superior competition.
- Networks / Schemes siphoning further profit off acquirers and issuers. We expect to see acquiring commoditised between margin expanding networks and, to an extent, PayFacs aggregating merchants.
- "Temporary" re-insourced business not coming back, or perhaps without the healthy margins that seemed to be attached to it.
- Regulatory risks and opportunities. We think the risks outweigh the opportunities. The state is intervening where possible to protect the consumer, not the payment acquirer, and international regulation is hard to come by, giving international players a less regulated playground that predominantly national players don't enjoy.
- IG Documentation and lack of any tangible fixed assets to speak of.
Here to discuss this name with you
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk