An airbrush image of Flash services
Image: Supplied
Pepkor Holdings has announced the merger of Flash, its fintech subsidiary, with merchant-focused trade enablement and fintech platform Shop2Shop, to create one of South Africa’s preeminent merchant commerce and fintech platforms, with annual throughput exceeding R200 billion.
This means that Pepkor shareholders can look forward to a planned future listing of the new merged platform, called FintechCo, possibly within 3 years. Shop2Shop is a fast-growing platform that provides acquiring, payments, cash management and business enablement solutions to small businesses, traders, and suppliers.
The date of the listing will depend on the speed of integration the two businesses, the market conditions, and with some time to build up a financial reporting history of the merged company, said Pepkor chief financial officer, Rian Hanekom, in an online presentation on Wednesday.
Pepkor will hold a controlling interest of about 57.1% in FintechCo, the new platform, with Shop2Shop owners and management holding the rest. The transaction implies an equity valuation of about R21.3bn and is expected to unlock meaningful operational synergies.
Pepkor intends to retain a 55% to 60% shareholding in FintechCo post listing, said Hanekom. Pepkor aims to realise an internal rate of return (IRR) of around 40% post synergies from the merger, which was the highest IRR compared with Pepkor’s other recent acquisitions, he said.
Pepkor also owns store chains such as PEP, Ackermans, Tekkie Town, Shoe City and Bradlows. The transaction reflects the group strategy to build a leading integrated and trusted fintech ecosystem in the country, said Hanekom.
Flash had annual revenue of R11.2bn at the end of September last year, while Shop2Shop’s revenue, which has some 177,000 informal traders on its books, was R9.3bn.
Flash’s earnings before interest, tax, depreciation and amortisation (EBITDA) came to some R900 million, with a three-year annual compound growth rate of 28%. Shop2Shop’s EBITDA to June 30 was R661m, with an 85% compound annual growth rate over three years.
“Together, Flash and Shop2Shop provide extended coverage of the informal market value chain, linking cash handling, acquiring, payments, value-added services (VAS) and related financial services,” the group directors said in a statement.
South Africa’s informal market represents a fast-growing segment of the economy, underpinned by resilient consumer demand and increasing merchant participation.
Flash and Shop2Shop are complementary businesses. Shop2Shop’s extensive merchant and payment network with upstream capability combines with Flash’s downstream VAS and digital product set capability to create an integrated platform with greater scale, reach and relevance.
“Shop2Shop was founded to bring purpose-built solutions to South Africa's large and underserved informal merchant market, to empower small business owners,” said Shop2Shop’s founder and CEO Peter Berry.
“We’ve built a broad product set on a platform engineered for high-volume, low-cost transactions. With Flash, we are able to deepen our offering and scale, and position a proven fintech platform in South Africa.”
The new combined platform will diversify and strengthen Pepkor’s earnings in its Informal Market Platform segment, marking a significant step in its strategy to accelerate growth in this space. It would be earnings accretive to Pepkor from the second year.
“This transaction is transformative for Pepkor and was the logical next step in expanding the group’s participation across the informal market value chain while extending the reach of our financial services ecosystem and supporting our ambition to build a leading digital bank with a nationwide distribution footprint,” said Pepkor chief commercial officer, Garth Napier.
In terms of the deal, Pepkor will pay R1.57bn cash for new shares in Shop2Shop; and contribute 100% of its shares in Flash, valued at R10.6bn.
The proposed transaction is subject to various conditions precedent, which include regulatory and competition authority approvals.
BUSINESS REPORT