Paysafe Still Looks Like a Bargain Before the SPAC Merger Closes
I have written several articles about a SPAC (special purpose acquisition company) called Foley Transimene Acquisition Corp II (NYSE:BFT). BFT SPAC is going to merge with a payments company called Paysafe and the stock will be renamed PSFE after the merger closes. I still believe the BFT stock (PSFE stock) is at least 62% too cheap.
Based on my calculations, the stock should be trading at least $25.60, using the information in the Paysafe merger slide presentation. I want to use this article to help you understand how I calculated that figure.
The crux of my valuation was explained in my Feb. 3 article on Paysafe (BFT stock). Paysafe is both very profitable and expects even higher profits by 2023.
On page 25 of the slide presentation, the company projects $1.88 billion in revenue by 2023. This represents an 11% average annual growth rate from its forecast revenue of $1.38 billion in 2020.
But its EBITDA (earnings before interest, taxes, depreciation, and amortization) will spike 21% annually over that period. Page 26 of the slide presentation shows that EBITDA will hit $744 million by 2023, up from $420 million in 2020.
We can use that $744 million projection to value BFT stock.
Valuing Paysafe Stock
Paysafe shows that its competitors have an enterprise value-to-EBTIDA ratio ranging from 16 times to 35 times. For example, on page 32 of the presentation, they show PayPal (NASDAQ:PYPL) at 35 times forward enterprise value-to-EBITDA multiple.
Paysafe deserves to have an enterprise value-to-EBITDA multiple as high as PayPal. I pointed out in my last article that Paysafe expects to have 39.5% EBITDA margins by 2023. Even in 2020, it will make $420 million in EBITDA on $1.38 billion, a margin of 30.4%. But PayPal made $4.295 billion on $21.45 billion in revenue, a 20% margin, according to Seeking Alpha. So giving Paysafe a similar 35 times enterprise value-to-EBITDA multiple should be no problem.
However, to be conservative, let’s just give it a forward multiple of 85% of 35 times, or 29.75 times. This follows the margin of safety rule that value investors like to use. Therefore, we multiply Paysafe’s 2023 forecast EBITDA of $744 million by 29.75. That yields an enterprise value of $22.1 billion.
Next, on page 4 of the slide presentation, Paysafe indicates that after the merger, there will be $1.805 billion in net debt on the balance sheet. Therefore, we subtract this from the enterprise value to derive the equity market value. That means that Paysafe’s target equity market value is $20.3 billion.
Lastly, we divide this by the number of shares outstanding after the merger. This is a little complicated. BFT’s slide presentation does not state the number of shares they expect. However, on page 4 of the slide deck, Paysafe says that the pro forma market value at $10 per share is $7.195 billion. This implies there will be 719.5 million shares outstanding. Moreover, the footnotes show there are 74.8 million warrants that are now in-the-money. So, in total there are 794.3 million shares fully diluted.
That gives us a market value of $25.60 per share. This is found by dividing the $20.329 billion market value by 794 million shares.
What to Do With BFT Stock
The $25.60 target price, using a lower than PayPal multiple, shows that BFT stock is still undervalued by at least $9.80, using the March 1 price of $15.80. That represents a potential gain of 62% from today’s price.
There is some basis for the lower multiple, though. I pointed out in my previous article that Paysafe’s take rate is only 1.5%, whereas PayPal has a higher 2% take rate. This is the average fee that the company charges on gross transactions to produce its revenue. So, in general, this means that PayPal has a slightly more valuable business model.
Nevertheless, Paysafe is considerably more profitable in the way it manages its expenses than PayPal. I showed that Paysafe has almost a 50% higher EBITDA margin than PayPal.
Therefore, I think that once the merger closes, and analysts begin to cover the stock, you may begin to see BFT stock move closer to $25.60 per share.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.