Jefferies rides European fintech deals wave

From left: Dominic Lester, Tariq Hussain, Nandan Shinkre

The US may be the centre of the technology universe, but Europe and the UK have been carving a niche of their own in fintech and open-source software. This has been reflected in capital markets activity, where the Jefferies technology team has been highly visible.

"Technology is exciting right now, with a lot happening in fast-growth technology companies," says Nandan Shinkre, Jefferies' European head of technology investment banking. "Our model allows us to work with companies throughout their life cycle, from growth capital funding all the way to more mature buyouts or strategic exits."

In credit

That has been particularly true in Europe. A case in point has been the UK's Callcredit Information Group, a credit checking agency. It had been majority owned by the Skipton Building Society, which sold it to Vitruvian Partners, a London-based private equity firm, in 2009. The price was not disclosed, though Skipton said the sale generated £40m ($51.5m) of "additional profit".

Five years later, in 2014, Vitruvian sold Callcredit to Chicago-based private equity firm GTCR, for a reported £480m. Jefferies acted as sole financial adviser to Callcredit. Fast-forward to early 2018, by which time Callcredit was the UK's second largest credit reference agency and the fastest growing. In April, GTCR announced that it was selling the business to TransUnion, a US credit reporting agency, for £1bn. Jefferies, Credit Suisse and Evercore were financial advisers to Callcredit.

Jefferies says it ran a "highly targeted" sales process with a limited number of private equity firms and strategic buyers. The price was about seven times Callcredit's 2017 revenue and 22 times that year's earnings before interest, tax depreciation and amortisation (Ebitda). That was not exactly cheap but, as one analyst noted, credit bureaus are rare assets.

The acquisition, which will be funded by debt, gives TransUnion stronger geographical reach and Callcredit has already been renamed as TransUnion UK.

"This is a good example of where the UK is very advanced," says Dominic Lester, Jefferies' European head of investment banking and European head of technology, media and telecoms. "It's a centre of financial services and multiple currencies, and its consumer credit market is even more advanced than the US."

Mr Lester points out that this was TransUnion's first foreign acquisition, and illustrated one of the prevailing themes in technology. "Fintech is something Europe does well, and here is a strategic buyer who sees that the UK is more advanced in this than the US," he says.

A corporate return

Another theme is that corporate buyers are back, according to Jefferies' European head of mergers and acquisitions (M&A), Tariq Hussain. "It used to be all private equity," he says. "But with Europe now a low-growth environment and corporates able to borrow cheaply, their shareholders are rewarding them for M&A, telling them to go for growth."

Trade buyers are typically slower than private equity firms when it comes to reaching a decision, but they will often offer better value to a seller.

Jefferies was also involved in this year's three-way public London market tussle over Fidessa, a UK provider of trading software and workflow automation products for financial institutions. Fidessa claims 85% of the world's leading financial institutions as customers. After Swiss financial software group Temenos offered £1.4bn for the company, US activist hedge fund Elliott Management Corporation disclosed a stake and invited higher offers.

Ion, a Dublin-based software group, and SS&C Technologies of the US both obliged. Ion won the day with an offer of £1.5bn. Jefferies was joint corporate broker and financial adviser to Fidessa – Hoare Govett, acquired by Jefferies in 2012, has been Fidessa's corporate broker since 2005. Ion is backed by Carlyle, the US private equity group. The price represented 4.7 times 2017 revenue and 25.9 times Ebitda.

Keeping it private

Private equity may be facing renewed competition in the buyout market, but it is still in the game. Earlier in 2018, Jefferies advised Swedish private equity firm EQT Partners in its $2.535bn purchase of Suse from Micro Focus of the UK. The deal was announced in July but has not yet closed.

Suse, founded in Germany, is an open-source enterprise software business. Its customers come from the financial as well as the corporate and public sectors, and it was the first company to market Linux software for the enterprise.

Software group Micro Focus had acquired Suse in 2014 as part of a string of purchases, some of which it was struggling to digest. Here too, Elliott Management emerged as a discontented shareholder and was pushing for changes.

EQT approached Micro Focus to suggest a deal. There was no formal sale process so, because this was a bilateral transaction, it could pay a premium without the price being bid up by deal heat.

Open-source software acquisitions are in vogue at the moment. Microsoft bought open source software repository GitHub for $7.5bn in June. IBM recently trumped that by paying $34bn for market leader Red Hat, Suse's biggest competitor, based in the US. A senior EQT executive said that one reason for buying Suse is that trade tensions may make European customers more comfortable with a European software supplier.

As technology becomes infrastructure, more private equity investors are turning to technology businesses and, unusually for them, are increasingly prepared to take minority stakes.

"Few software technology investments have gone bad – they are very hard to blow up – and that gives private equity comfort," says Mr Lester. So financial sponsors who never did technology deals before are doing them now, he adds.

"All industries are affected by technology so you must understand it – you need technology experts in your fund," says Mr Lester. "It's unusual to find good technology companies that are not growing at 20% a year, so you can achieve decent returns without leverage."

Strategic thinking

Private equity is now starting to think like a strategic buyer and is more willing to pay up. That said, many technology companies, particularly in the US, do not want to sell control to private equity. "So private equity will now take a minority stake, and a number of them have launched dedicated minority funds," says Mr Lester.

With all this competition, the initial public offering (IPO) market in Europe for technology businesses has been somewhat challenged. Moreover, outside London, Europe lacks the sophisticated technology investor base found in the US. One of the few IPO highlights of 2018 was that of Avast Software, a Czech provider of security software for IT devices and phones, which listed in London in May.

Back in 2014, Jefferies had acted as sole financial adviser to CVC Capital Partners when it made a major investment in Avast, at an implied enterprise value of $1bn. Jefferies says that its knowledge of Avast and access to management allowed CVC to negotiate on an exclusive, bilateral basis. It was also joint lead arranger and joint bookrunner on the $420m senior secured credit facilities that supported CVC's investment.

In 2016, Jefferies was sole financial adviser to Avast on its acquisition of rival AVG Technologies for $1.4bn, and joint lead arranger of $1.685bn in related credit facilities.

CVC and the founding shareholders decided on an IPO as the best way to monetise their positions, and chose London as the venue.  The flotation of 25% of the company was worth £602m, valuing the company at £2.4bn. Though the shares were priced at the bottom of the proposed range, this was London's biggest IPO of the year. Jefferies was a joint bookrunner.

"Sometimes when you sell a company, you say goodbye to your client," says Mr Lester. "But we have stayed in touch with many of these companies."

Why? Mr Lester maintains it is because, unlike many competitors, Jefferies has a large technology team in Europe as well as the US. "And we can do it all," he says. "[As a bank less constrained by regulations], we can help to finance a deal more aggressively and very quickly. And we can take companies public."