VeriFone’s Battered Stock Makes LBO Bargain: Real M&A
VeriFone Systems Inc. (PAY) is more susceptible than ever to a private-equity takeover after dismissing its chief executive officer and declining more this year than almost every other large U.S. stock.
The company presents a bargain after falling more than all Russell 1000 Index (RIY) stocks but five in 2013, fueled by a disappointing earnings projection that prompted a single-day slump of 43 percent, according to data compiled by Bloomberg. The shares trimmed their loss on March 12, rising 6 percent after CEO Douglas Bergeron was ousted, which Raymond James Financial Inc. said removed a potential obstacle to a deal.
Wedbush Inc. says VeriFone’s cash production makes it an alluring target for private-equity firms, which use the money generated by acquired companies to pay off the debt that funded the transaction. VeriFone’s stock drop means its valuation relative to free cash flow is two-thirds cheaper than Ingenico, a rival maker of credit-card terminals, data compiled by Bloomberg show.
“VeriFone has fairly stable cash flows, and private equity could see value in buying VeriFone and cleaning up all the mistakes,” Gil Luria, an analyst at Wedbush in Los Angeles, said in a telephone interview. “You could fix the business and have it grow at industry rates.”
Andy Payment, a spokesman for San Jose, California-based VeriFone, declined to comment when asked about the company’s takeover prospects, citing a policy of not responding to speculation.
VeriFone’s market value has shrunk to $2.2 billion after the company’s stock retreated 30 percent in 2013, closing last week at $20.68. That’s near the 32-month low of $18.24 reached on Feb. 21 after VeriFone said earnings this quarter will be 45 cents to 50 cents a share, trailing the average of analysts’ estimates of 80 cents, data compiled by Bloomberg show.
Some of the declines could be due to VeriFone’s failure to update its products in markets outside the U.S., and that could be rectified in the next several quarters, said Wayne Johnson, an Atlanta-based analyst at Raymond James. Also, product lines acquired when VeriFone bought Hypercom and Point are dragging down the company’s financial performance and should be eliminated or restructured, Luria said.
The company’s main business is providing in-store terminals that process credit- and debit-card payments. In recent years, VeriFone’s hold on the card-terminals market has been threatened by newcomers like Square Inc., EBay Inc.’s PayPal, Intuit Inc., Groupon Inc. and Bank of America Corp.
SunTrust Banks Inc.’s Andrew Jeffrey said a private-equity buyer could accelerate VeriFone’s expansion into services such as providing security for transactions. VeriFone aims to boost that segment of its business, which made up 28 percent of sales in fiscal 2012 and 21 percent in 2011.
“It’s certainly easier to make that kind of a big transition as a private company,” Jeffrey, an analyst at SunTrust in San Francisco, said in a phone interview. “It makes a lot of sense long term.”
Bergeron made the same point in a March 11 interview.
“In retrospect, it’s a very hard transformation to do cleanly as a public company,” he said.
He had been VeriFone’s CEO since 2002, and helped take the company -- which had been owned by private-equity firm Gores Technology Group -- public in 2005. In addition to surrendering the CEO role last month, Bergeron quit VeriFone’s board. Chairman Richard McGinn was named interim CEO.
His departure could make the company more open to a takeover, Johnson of Raymond James said.
“Bergeron may not have been that receptive to a take-out offer at these levels,” Johnson said in a phone interview. “A barrier has been removed.”
Bergeron worked at Gores before becoming CEO of VeriFone. He may eventually go back into private equity, Bergeron said in the March 11 interview.
Private-equity suitors could get into the payment-terminal business relatively cheaply via VeriFone. Its shares traded for 14.8 times free cash flow at the end of last week, or 68 percent less than Paris-based Ingenico (ING)’s multiple of 45.6, data compiled by Bloomberg show. Among transaction management systems companies trading for more than $500 million, the median multiple was 18.2, the data show.
Today, VeriFone shares rose 2.6 percent to $21.21, the fourth-biggest gain in the Standard & Poor’s MidCap 400 Index.
Even though VeriFone forecast less fiscal second-quarter earnings than analysts projected, the company said on March 5 that free cash flow this year will be $170 million to $190 million, up from $154.8 million in fiscal 2012.
“Private-equity firms like attractive cash-flow yields,” Meghna Ladha, an analyst at Susquehanna International Group LLP, said in a phone interview. “The business is fundamentally a good business, it was just an execution issue. I don’t see why it can’t be fixed.”
To be sure, potential acquirers may be deterred from buying VeriFone because it isn’t performing well, Jeffrey said.
“It’s easier to buy a company that’s operating well, but is undervalued, than one that has a lot of uncertainty,” he said.
The size of VeriFone’s retreat -- its shares are down 64 percent from a March 2011 peak of $56.84 -- could mollify any concerns, Northcoast Research Holdings LLC’s Keith Housum said.
“I completely think that VeriFone is a company that could be bought,” Housum, an analyst at Cleveland-based Northcoast, said in a phone interview. “Whenever you have a company with a significant value decline, the vultures start circling.”
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