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Nasdaq and JSE-listed financial technology business Net1 Technologies announced a “transformational” deal, acquiring the Connect group for a whopping R3.7bn. Given that Net1’s market capitalisation stands at around R6bn, the deal is significant and will broaden Net1’s exposure into the South African informal sector. The legacy-stricken business has recently had a management overhaul, with Investec corporate and investment banking veteran Chris Meyer taking the reins mid-year. Meyer outlined the thesis and rationale for the acquisition, with the deal targeting market share in the micro, small and medium enterprises merchant space. The informal economy has a large addressable market, so despite the Connect group already serving over 40,000 merchants, there is ample room for growth. This will complement Net1’s existing business, which currently serves the more formal economy. Net1’s management overhaul along with this ground-breaking corporate activity could be an inflection point for a business that has struggled to get going over the years. – Justin Rowe-Roberts
Chris Meyer on Net1’s business background:
We at Net1 are a financial technology business and our core purpose is about bringing financial inclusion to South Africa’s underserved customers. That is both consumers and small and micro merchants. So, we’re a technology-based business and we bring a range of financial products and services to those consumers.
On the rationale of the transaction:
Our vision for our business is to grow it into South Africa’s leading fintech platform; offering payment, processing and financial services to underserved merchants and consumers. If you look at our business today, we’ve got a very well-established presence in the consumer space. We have over a million customers already. We’ve got fantastic products, great reach, great distribution and we are well positioned. But when you think about the model of being the leading financial technology player across merchants and consumers, what’s critical for us to build out within that is a presence in the micro, small and medium [enterprises] (MSME) space. In one move, the Connect Group helps us fill that gap. It is a leading player in terms of providing financial services to micro and small merchants in South Africa. It has a reach of over 44,000 merchant customers already in that space. So that’s really it. If you look at Net1 in the merchant space today, you probably know us for EasyPay. We have the EasyPay payments infrastructure. But that’s focused in the formal sector and probably in the large corporate space, in particular. What we want to do is build a presence in that micro and medium merchant space. The Connect Group opens that up for us in a transformative way.
On how the deal was structured:
As I say, it’s transformational. The size of the Connect Group coming in is roughly the same size as our existing business. So, you are absolutely right, yes, $3.7bn. The overall enterprise value is actually R4.8bn. So [to clarify] how the deal was structured; R2.3bn of that is debt and about R1.1bn of that will replace existing debt within the Connect Group. The rest is new debt that we will take on at the holding company level. Then there are just R480m of deferred shares that we are issuing. Of that, about R138m is going to staff as part of an incentive structure. The rest, which is around R2bn, we are going to fund through cash resources, which we have on the balance sheet already.
On the opportunities within the informal economy in South Africa:
South Africa is primarily a cash-based economy; 60% of transactions are conducted in cash in South Africa. This is common across some other middle-income countries. And the second trend is this secular shift that we see from cash to digital cash remains important. It’s the entry point into that digital journey. The additional factor in the South African context, which you are referring to, is the size of the informal sector. We think in the MSME space in the formal sector, there are about 700,000 small and micro merchants. But when you look into the informal sector, it’s double that. You know, there’s 1.4 million. We feel it is a sector that is overlooked, underserved and is really the market we see the growth in. When you look at the Connect Group, it already serves over 40,000 merchants. Of that, 35,000 or thereabouts are in the informal sector. That puts us at the leading edge in terms of moving into supporting and serving the informal merchants in South Africa.
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