PayU’s acquisition of BillDesk Signal Consolidation in the payments industry?
The Indian fintech space has seen one of the largest transactions in recent years, with PayU announcing that it will acquire the BillDesk payment gateway. PayU will acquire control of BillDesk for $ 4.7 billion, with each of BillDesk’s founders receiving around $ 500 million from the sale.
PayU is owned by Prosus, a subsidiary of Naspers, which serves as the holding company for Naspers’ international digital assets. The acquisition of BillDesk is part of PayU’s growth strategy by acquiring companies. Its activities in Colombia and India, its most active markets, have grown through acquisitions.
Pagos Online was a Colombian payment company which was acquired by PayU to expand its Colombian operations. Likewise, it also acquired Citrus Pay in India to increase its payment business in 2016. It then acquired Wimbo and PaySense in 2019 and 2020 respectively.
BillDesk has so far proven to be the antithesis of the startup environment in India. BillDesk had entered the “fintech” space long before the term was coined. Its founders were in their late twenties and early thirties, unlike much younger founders today. It was founded in 2000 and received its first venture capital investment from SIDBI Venture Capital and Bank of Baroda. Both are government-run companies that are a far cry from today’s glitzy venture capital world.
Unlike today, capital was scarce and startups struggled to raise external funding. The pressure to become self-sufficient has led the company to become profitable, unlike other startups in the fintech space who continue to spend money to generate profit.
BillDesk’s first-mover advantage has allowed it to capture nearly 50% of the market. It facilitated approximately $ 91 billion in online transactions in 2021. BillDesk controls a significant share of the government agency payment processing market. With utilities and other government agencies on board, the business doesn’t face cyclical changes unlike other businesses.
BillDesk also provides services to several companies in the financial sector. PayU, which had until now focused on the Internet segment, lost market share to new competitors and lost first place. Acquiring BillDesk can help diversify beyond the internet payments industry and grow.
Over time, the fees per transaction have continued to decline for payment gateways. Therefore, with their fixed cost structure, it is important for payment companies to have high transaction volumes to generate profit. In recent years, several players have entered the segment, which could lead to lower volumes for each player. As many new entrants are still posting losses, it is likely that the sector will continue to consolidate.
There are reports that BillDesk’s investors and founders have been seeking to pull out of the business for a few years. Although it sold minority stakes, BillDesk was looking for investors to buy the entire company.
BillDesk continued to focus on payment gateways while other fintechs like Google Pay, Paytm, BharatPe, and MobiKwik focused on customer-centric segments that require substantial spending to attract users, resulting in high cash consumption. . With the growing need for scale, companies could opt for mergers and acquisitions and the acquisition of BillDesk could mark the beginning of the consolidation phase in the industry.
BillDesk generated around $ 231 million in revenue and around $ 35 million in profit, resulting in a price / sales ratio of over 20. The high premium paid by PayU may take into consideration the dominant position of BillDesk and the strong growth expected in the coming years as more users switch to online payments. The deal comes at a time when tech startups are publicly traded and are posting valuations of up to 40 times sales, without making a profit over their entire lifespan.
Paytm has announced its listing plans and is expected to price the initial public offering at similar valuations. Considering BillDesk’s status as the only profitable fintech unicorn, BillDesk’s ratings seem fair from PayU’s point of view. For founders, the acquisition saves them the hassle of finding an investor or listing BillDesk on the stock exchange.
With the acquisition of BillDesk, PayU will now have a total payment value of approximately $ 147 billion, which would elevate it to the rank of the best payments companies in the world. The two companies appear to complement each other as BillDesk caters to old economy companies and PayU caters to new age technology companies. The deal would be the second largest in the internet space after Walmart’s takeover of Flipkart.