Worldline - No Rush - Model Update
All,
Please find our updated model on Worldline here.
With the rights issue underway, it’s probably a timely moment to set expectations for this French payments acquirer. Flush with cash, there is no short term rush, but unless a long list of things goes well, the longer dated bonds may never be this tight again. The company is in a strategically complicated position, where the playing field increasingly tilts to other players in the value chain, and saddled with gigantic opex, the expected savings from platform consolidation will be necessary to defend its market position. Considering clients’ switching costs, Worldline should have some margin for error, but it may need that in light of the slightly underwhelming capital increase. At 9% YTM, we don’t feel the rush.
Investment Rationale:
- We don't like it. We were short briefly last year on the off-chance the smaller division might unravel, but when that did not materialise, we closed the position and have not participated in the rally that was mostly driven by the capital raise and liquidity from asset sales. Worldline is in a much more stable position now, even if not yet growing again, but the business is too small for the debt it carries. Yes, this will change as its large cash and receivables balance will pay down the front end of its converts and bonds, but looking through to 2028, we are still not convinced that worldline can carry the remaining €1.65bn that would allow it to keep over €500m of cash on the balance sheet, and we (and certainly clients) would feel more comfortable with €1bn. Still, there is no rush in the short term.
- We can rationalise the idea that cost savings can pay for margin erosion in the coming years, even if restructuring in Western Europe will be expensive, but we are not convinced that acquirers are strategically in strong enough a position to defend their territory. Scheme fees are rising.
- On the upside, we consider 8-9% of YTM on ~6% of running yield too tight for a situation that may always be bailed out, but still holds scenarios involving an eventual A&E, if not an LME. On the downside, those scenarios could leave creditors impaired in the long-run, but it's too early to put a value on those outcomes. We were slightly disappointed by the €500m size of the capital raise.
- Surviving line from 2025: "Worldline is a bad business with a good balance sheet. Within the growing payments industry, it is in the slow growing verticals and saddled with legacy systems and 2x as many employees as its more nimble rivals (Ayden)".
Key Conclusions:
- Worldline itself is worth less than the debt it carries. Only when factoring in the expected proceeds for MeTS and some smaller businesses, as well as the proceeds from its capital increase program (together €1bn) and add the significant (if needed) cash balance, do we arrive at positive shareholder value. The large restructuring programme will significantly reduce headcount. We expect the margin benefit of these cost cuts to be largely passed on to customers to fend off more efficient competition.
- H225 performance landed at the low end of guidance, with Merchant Services still slightly soft on higher scheme fees and customer churn, while Financial Services showed no clear organic inflection despite an improving pipeline. Management's 2030 plan centres on platform consolidation and cost reduction, targeting broadly flat profitability. We think it's credible (Current Trading).
- Margins will remain lower but may stabilise: management's plan projects flat margins through 2030 on the back of heavy restructuring investment offset by price erosion as cost savings are passed to customers. The 2024 re-insourced FS business is now effectively confirmed as permanently lost — management quietly dropped the "temporary" label. The FS division did not destabilise as feared, but structural cost headwinds in Merchant Services have emerged instead (Current Trading; Model).
- Medium-term growth is expected to lag historical assumptions. Before growth resumes, both divisions will likely go sideways for another year on their reduced footprint. The 2030 targets imply the company will give up share to faster-growing new-economy players, consistent with its legacy-system consolidation role. Worldline remains an amalgamation of complex carve-outs, now further pruned by disposals, with goodwill impairments underlining how sharply expectations have been revised downward (Model; Company).
- The business on its reduced perimeter is too small to carry its debt comfortably. EV alone (before cash and fresh capital) covers the SUNs only to ~50%. Only when including the full cash balance, assets held for sale (unlikely all cash), and the capital increase do we arrive at positive equity. The proceeds will help limit refinancing costs on the cheap front-end debt, but implementing ambitious cost savings will consume FCF for years. Worldline retains a large undrawn RCF as a backstop (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).
Recent Trading:
- Accelerated restructuring and equity raise. The strategic pruning has expanded materially, with multiple assets being exited. Over €500m of proceeds are expected over the coming year. Alongside this, the company is raising fresh equity from both cornerstone investors and a rights issue, partly to address upcoming maturities but primarily to fund a large restructuring that will significantly reduce the workforce, a margin benefit we expect Worldline to give up to customers to fend off the more efficient competition.
- Balance sheet and expectations reset. Cash pooling has been simplified, and additional goodwill impairments underline how sharply expectations for the business have been revised downward.
- Management reset guidance on the smaller perimeter following the sale of PaymentIQ and MS India, which removes meaningful revenue and EBITDA from the group despite being LFCF-neutral. 2026 guidance is for modest growth and flat FCF due to turnaround costs and “North Star” investment. The 2030 plan centres on platform consolidation and cost extraction, feathering volume growth offset by price declines as the company gives up margin achievements to its customers. Targets are broadly consistent with today’s profitability. Overall, the plan appears credible.
- Performance landed at the low end of guidance, driven by Merchant Services, the decline in Financial Services was broadly as expected.
- Merchant Services stabilising was supposed to recover in H225, but still saw slightly softer revenues and unfortunately saw costs rise on higher scheme fees and other costs. We also suspect that the churn in customers saw relatively profitable (overpriced) business exit last year. Nonetheless, Q4 revenue showed sequential improvement, with SMB trends recovering in several Northern European markets as terminal supply issues eased and churn improved, though Benelux remains weak. Enterprise softened due to retail churn but self-service verticals rebounded. Product initiatives (Global Commerce, Tap-on-Mobile, Wero) are progressing but not yet material to group earnings.
- Financial Services: slowdown easing but no inflection yet. Commercial momentum is improving, and the pipeline looks strong, but the expected H2 recovery has not materialised. Re-insourcing effects seemed to persist well after they should have annualised, and additional contract exits added pressure. Positively, issuing volumes remain healthy, and the Nimbus instant-payments platform has begun onboarding clients.
Long-term thoughts:
- Time: There is no rush. The two puts from Eurobank and Axepta are unlikely to be exercised. There may be no way around redeeming the convertibles, but the '27s (also cash covered) are cheap and will have to wait a little longer. This would leave a more manageable €1.65bn of debt on the balance sheet and provide 2.5 years’ time to September '28.
- The '26 convertibles will have to be paid. But thereafter, depending on fundamental turnaround, the company may have to request an A&E or even a drop-down. The cash war chest is helpful in this context, and the IG Documentation should help, but we note that a restructuring or debt/equity swap could be difficult if FS customers can re-insource their business. There are no tangible fixed assets.
- 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 (H225 scheme fees were up €50m). We expect to see acquiring commoditised between margin expanding networks and, to an extent, PayFacs aggregating merchants.
Here to discuss this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk