Trustly fields SPAC interest en route to IPO amid ESG questions – advisers

12 February 2021

  • Gambling exposure could raise investors’ eyebrows
  • SPAC listing viable but seen as plan B
  • Lofty valuation ambitions questioned

Sweden’s Trustly has received inbound interest from special purpose acquisition vehicles (SPAC) en route to its planned IPO amidst criticism that environmental, social and corporate governance (ESG) concerns could turn off potential public market investors, four sector advisers said.


Owner Nordic Capital hired Goldman SachsJP Morgan and Carnegie for a Stockholm flotation of the payments processing firm expected as early as April, according to reports. The sponsor is finalising the IPO syndicate, according to a source close to the situation.


Nordic Capital has contemplated the SPAC route as it is less intrusive than an IPO process, with fewer disclosure requirements, the first and second adviser said.


While there have been multiple approaches by SPACs and other potential trade and sponsor buyers, Nordic Capital is focused on the IPO since it would allow it to capitalise on a longer-term investment, according to the source close. 


Trustly, which enables direct transactions between bank accounts without middlemen such as PayPal and cards, reportedly expects a valuation of EUR 7bn-EUR 9bn (USD 8.5bn-USD 11bn). 


But its valuation ambitions could be dampened by the fact that its core business relies on facilitating payments from gambling websites, the advisers said. Gambling is responsible for more than 50% of the revenues, according to the source. 


Despite lucrative returns, most mainstream payment providers avoid merchants in gambling due to reputation damage, risks of fraud and reverse charges from customer complaints, the first and a fifth adviser agreed.


The collapse of Wirecard, which facilitated payments for gambling as well as adult entertainment websites, has made investors more concerned about risks related to ESG, highlighting how a lack of adherence can hurt the creditworthiness and reputation of a business, two of the advisers said.


Several tier one pension funds have already expressed unease in associating with Trustly, according to the second adviser. Other investors may be more comfortable and view the business as a safe bet. Still, Trustly’s exposure to high-risk clients will influence its valuation, “even if there is little proof on the lack of responsibility around these issues”, he added.


A successful listing will depend on how well Trustly spins its positioning and whether it can bring key institutional investors on board, a sixth adviser said.


Although Trustly does depend on gambling, it is also working hard to reduce said exposure, said the source close and the sixth adviser. Institutional investors have quizzed the company on the ESG front, the source conceded, but those points are being addressed as it grows on additional verticals, including e-commerce and financial services. 


Trustly only operates on regulated gambling markets, while competitors operating on unregulated markets tend to have more “know-your-customer” (KYC) and charge-back concerns compared with Trustly’s account-to-account tech solution, which is less costly and more secure, the source added.


If it were to explore further the SPAC route, London-based Paysafe’s merger with Bill Foley’s SPAC Foley Trasimene would be the deal’s blueprint, according to several advisers. Paysafe’s listing via a SPAC rather than an IPO was in part motivated by the business’ residual risk exposure to gambling, the first and third advisers said.


Paysafe has also sought to diversify away from its roots in handling payments for online gambling in the last five years, the third adviser said, adding that SPACs that missed out on Paysafe will likely target Trustly.


Frothy valuation hopes amid regulatory uncertainty

Trustly’s price expectations of up to EUR 9bn are far above the EUR 700m it fetched in 2018 when Bridgepoint Development Capital and the founders sold a majority stake to Nordic, as reported. 


The company, which merged with US-based PayWithMyBank in 2019, expects a jump in revenue of 53% YoY to EUR 200m for FY20, as reported. EBITDA is about EUR 100m, the source said.


The sellside will aspire to value Trustly against fast-growing payments businesses such as Adyen [AMS:ADYEN], which trades at 17.2x EV/sales and a whopping 165.7x EV/EBITDA. Trustly has a cash conversion of 100% and the same growth rate as Adyen had three years ago, the source said. But the business is unlikely to garner a multiple as lofty as Adyen’s, partly because the latter is exposed to healthier verticals, said one of the advisers. Even at a discount to Adyen’s trading multiples, Trustly should fetch its expected valuation comfortably, the source added.


Payment groups Global Payments [NYSE: GPN], Fiserv [NASDAQ: FISV] and FIS [NYSE: FIS], Mastercard [NYSE: MA] and Visa [NYSE: V] could be added to a wider benchmarking universe, two of the advisers agreed. But Visa and Mastercard are not ideal peers as their top-line growth of 15%-20% is well below Trustly’s, the source said.


Paysafe, which was valued at a 13.8x 2019 EBITDA in its merger with Foley Trasimene, would also be a benchmark, they added.


The wider peer group, excluding outlier Adyen, trades at an average EV/EBITDA of 27.3x and an average EV/sales multiple of 13.4x. Mastercard and Visa are at the top end of the spectrum with EV/sales in the 20x range while the other trade in the single digits.  


Modelling Trustly’s valuation on the average 27.3x EV/EBITDA multiple and estimated EUR 100m EBITDA would yield an enterprise value of just EUR 2.73bn, according to Dealreporter analytics. 


Trustly’s equity story will play on growth, the third adviser and source said. Its technology is “super” and there is scope to expand globally and diversify into other e-commerce verticals over the next five years, the adviser said.


The business has commercial opportunities in the US, where card transactions are more expensive than account-to-account ones, the source said. One of the advisers cautioned that diversifying into other verticals – less profitable and more competitive than gambling – could impact earnings over time.


The first adviser questioned whether Trustly’s business model was sustainable in the long term in the face of tighter gambling regulation and negative media coverage of scandals like Wirecard’s.  


The source noted, however, that Trustly has managed to grow in Sweden even as gambling regulation came into effect. The third adviser also argued that gambling is difficult to regulate further given the lucrative returns. There is strong growth in America following gambling deregulations, and in Asia, where populations have a lot of disposable income.


The second payment services directive (PSD2) could also hurt Trustly’s growth prospects, according to the fifth and a seventh adviser. 


PSD2, which became applicable in 2018, aims to boost competition on account of “open banking” by forcing banks to allow third parties, including fintech companies, to access the data of customers who authorise it. “Trustly’s technology predates open banking and PSD2 but now the whole payments space is moving and adapting to regulations,” the fifth adviser said.


The lingering question is whether Trustly has the brand awareness and competence to maintain its position and expand globally alongside the likes Global Payments, Fiserv, the second and seventh advisers said.


Nordic Capital and Trustly declined to comment.

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