Guest Pitch: SmartPay Holdings (SMP:AX)

Potential Buyout (covered at A$0.92/share)

This idea was shared by Harrison.

Before we get into the pitch, let me share a brief business background. Smartpay is an Australian merchant acquirer—meaning it provides card payment terminals to shops, cafés, and other merchants, and earns a share of the fees from processing card transactions. In Australia, passing on card payment fees (typically 0.5%–3%) to customers via surcharges is both legal and relatively common. While the merchant acquiring space is largely dominated by the major banks, Smartpay is one of the few upstarts gaining real traction. Its standout success comes mostly from its ‘zero-cost’ product offering: merchants receive terminals at no upfront cost, card processing fees are automatically calculated and surcharged to customers, and the backend software handles compliance with regulatory and bookkeeping requirements. In effect, Smartpay built a frictionless solution for surcharge pass-through—enabling it to become the fastest-growing merchant acquirer in Australia, compounding at 36% annually over the past five years.

Now let’s get into the buyout case. Here’s a brief timeline of recent developments:

• March 16, 2025: AFR reported that Smartpay had received takeover offers from at least two parties: peer Tyro Payments and a certain international payments “heavy-hitter”. Sources also noted “a handful of parties” is circling SMP.
• March 17: Smartpay confirmed the rumours. Tyro proposed a mix of stock and cash worth ~A$0.925/share. The second offer came from an unnamed “international strategic”. Both suitors were granted non-exclusive due diligence.
• March 20: A media report suggested that Tyro’s A$0.925/share offer was too low and unlikely to win shareholder support.
• May 2: Smartpay revealed that on April 25 it had received a revised bid from the previously mentioned international strategic at ~A$1.11/share in cash. The parties entered into an exclusivity agreement through June 9, although SMP will be able to start engaging with other bidders from May 26. Importantly, management also highlighted that it had received multiple proposals from a third bidder, described as “another international strategic”.
• May 5: Tyro withdrew from the acquisition process.
• May 5: AFR reported that the party behind the A$1.11/share bid is Shift4 Payments, a global payments processor with an $8bn market cap. The third bidder was named as a Global Payments, a US$19.4bn fintech company.

SMP trades at A$0.92/share or a 20% spread to the A$1.11 bid. And then there is another party, which could still make an offer. The dynamics of the situation are intriguing.

I believe the current spread is driven by a number of factors listed below. I will address all of these next as I think most of them have very solid counterarguments.

• One of the bidders, Tyro, walked away during due diligence.
• Valuation is a bit tricky to assess. The announced bids value SMP at substantially higher multiples than where peers trade at. The latest disclosed offer, at A$1.11/share, implies 14x TTM EBITDA and 29x TTM FCF. Meanwhile Tyro, the closest local peer, trades at just 5x EBITDA and 16x FCF. There aren’t many other close competitors, but Global Payments, a much larger player with merchant acquiring exposure in Australia, trades at 12x EBITDA. Worldline, one of Europe’s biggest merchant acquirers, trades at just 4x (on Warsaw Stock Exchange).
• Surcharging business in Australia is under a threat. In Oct’24, the Australian government proposed banning “unfair and excessive” debit card surcharges by payment providers. The Reserve Bank of Australia is conducting a review, with a final decision expected in the second half of this year. The change could be implemented starting in 2027. SMP’s business model seems to be quite exposed to this, as its key attractiveness lies in making surcharging easy/frictionless for merchants. If the new rules go through, it could undermine the company’s competitive advantage and growth story.
• The buyout process is still at a non-binding stage. The market is already pricing in ~68% chance for the A$1.11 offer to close. If all takeover attempts fail, downside to pre-announcement levels would be around 40%.
• It’s somewhat unusual that Smartpay still hasn’t disclosed the identities of the two “international strategics”, especially the one they’ve granted exclusivity to. The bidder clearly prefers to stay under the radar, and it’s not clear whether that’s because it’s still pretty uncertain/cautious about the acquisition, or it just doesn’t want any public scrutiny mid-process.

The withdrawal of Tyro. I think the decision is way less concerning than it seems. Just days before the bidder pulled the plug, media report surfaced that Tyro itself was being reviewed for a potential buyout by Stripe. That followed earlier reports from February, which said that Tyro was open to a takeover amid its struggling share price. So it’s entirely possible that Tyro exited the Smartpay process to simply focus on its own sale.

The language in Tyro’s withdrawal statement is also interesting:

Tyro was informed of Smartpay’s decision to enter an exclusivity arrangement with another party for a cash offer of NZ$1.20 per share on Friday 2 May. This was prior to conclusion of the agreed due diligence process and receipt of an update to Tyro’s cash and scrip synergistic merger proposal.

It looks like Tyro was willing to raise its previous A$0.92/share offer, and then chose to drop out after exclusivity with the other bidder was announced. This kind of makes sense in relation to the above mentioned interest from Stripe in Tyro itself. It might have had no time to wait a month to get clarity on SMP’s position, and risk losing its own sale talks in the meantime.

At the very least, the press release language suggests that Tyro didn’t walk away because it had uncovered something troubling in due diligence or just lost interest in Smartpay altogether.

Valuation and regulatory changes. SMP’s premium valuation relative to peers is supported by its superior business model, growth and margins. For example, Tyro has been growing at 20% CAGR over the last 5 years, with EBITDA margins at low double digits (12% in FY24). In contrast, SMP increased revenues at 36% CAGR, and is boasting stable ~22% EBITDA margins.

As for regulatory changes, management insists the impact will be limited. It claims that even if surcharging is banned, most merchants would simply shift to a fixed-fee model, and the impact on SMP’s Australian revenues would be only ~10%. Here’s the excerpt from November 2024 earnings call:

What would be the impact on Smartpay from an outright ban on surcharging? Whilst we do not believe an outright ban on surcharging is a likely outcome of the RBA review, given historically the RBA has favored market mechanisms with guardrails over outright bans, we have run a number of scenarios and completed modeling to review any impact from the range of options the RBA may ultimately determine are appropriate.

With specific regards to surcharging, in the scenario where the RBA determines to provide more clarity on surcharging guidelines and there is more enforcement of excessive merchant surcharging, we would expect no impact to our business. At the other end of the spectrum, should the RBA determine to ban all surcharging outright, our SmartCharge customers would need to pay the acceptance fees themselves and SmartCharge would no longer be available as a product. In this instance, there would be no immediate impact on Smartpay as customers would simply transition to our simple flat rate product and pay the fees for transactions directly.

We have modeled the potential need to adjust our product suite to ensure we retain our existing customers and can continue to attract new customers to Smartpay at the same volume we do today. Maintaining a highly competitive offering highlights this could have up to a 10% impact on our Australian revenues over time. As I have stated to date, the RBA is considering a range of options as part of their payments review. We’re simply determined to address today what we believe is the primary concern related to Smartpay, which is the outright banning of surcharge. In this unlikely instance, our customers will simply move to our existing simple flat rate product.

I’m not sure these projections should be taken at face value—my gut feeling is that the impact should be larger, especially regarding future growth. However, we have to keep in mind that this industry-wide risk is not new; it’s been known for quite some time. Despite these risks, interest in SMP has still surfaced, even though its closest peer Tyro is trading at much lower multiple and is less exposed to the surcharge policy changes. Clearly, there’s something in Smartpay that industry players find very attractive. Maybe it’s the software stack. Maybe it’s the customer base and the potential for cross-selling other payment or banking products. Maybe it’s a bet that regulation won’t land as harshly as feared. Whatever the reason, the ones making the bids likely know way more than I do.

This Oct’24 article argued that the market had overreacted (stocks are down a lot since) to the upcoming surcharge policy changes. The analyst suggested that the impact on both SMP and Tyro would be “overall neutral,” as merchants would simply bake processing fees into product prices, and regulators would also lower certain other payment fees (that go to card holder’s banks) which would offset some of the price inflation. This analyst was spot on saying that both SMP and Tyro “will be potential targets for private equity as listed investors potentially overreact due to the uncertainty around future cash flows.”

If the regulatory threat turns out to be less serious than it seems, the current takeover interest may prove quite opportunistic. Back in August 2024, before the regulatory review talks started, SMP was trading around A$1.15/share, and was valued at ~12x EBITDA and ~31x FCF. The latest A$1.11/share bid simply brings the stock back to those pre-review levels. So if the regulatory change impact will be modest only, the headline premium in the current offer isn’t as generous as it looks.

Non-binding stage. The market is already pricing in roughly a 68% chance of success, and the setup looks fairly valued from the probabilistic perspective. But, we also need to take into account potential for a bidding war. A “handful” of buyers were reported to be circling. At least two large strategics have been confirmed to be engaged, and both have made multiple bids. So the interest is there.

The risk of Smartpay derailing the sale by holding out for an ambitious price seems low. The company has entered into exclusivity agreements, suggesting management is more or less comfortable with the current A$1.11/share offer. That likely reflects the views of major shareholders as well. The company is tightly held with around 60% of the stock in the hands of just four investors. There has been no public pushback, unlike the immediate skepticism that followed Tyro’s A$0.92/share bid.

It’s very likely that one of the bidders is Shift4 Payments. While Smartpay hasn’t confirmed the identities of the two ‘international strategics,’ it seems that Shift4 Payments is the one with whom SMP has entered into exclusivity. AFR reported this to be the case last week. Shift4’s involvement would make sense. It’s a serial acquirer in the payments and POS space, with a long track record of rolling up hardware and software providers. Back in February, FOUR was talking about entering Australia and New Zealand, with a planned launch in early 2025. Acquiring SMP would accelerate the process.

To give a sense of how aggressively Shift4 approaches M&A, in 2024 alone it evaluated 300 deals, conducted due diligence on 50, submitted offers on 15, and closed 5 (see here). If they’re at the table now, it’s not a casual flirtation.