Lesaka’s burning along the acquisition trail

Lesaka will use its latest R1.6bn acquisition to test the waters for a consumer base beyond its traditional business anchored by social grant recipients.

The group, which has a primary listing on the Nasdaq and a secondary one on the JSE, distributes low-cost financial and value-added services (VAS) to small businesses and consumers through its banking and payment technology.

“We have an opportunity to start thinking about customers who we think are underserved within the lower LSM — let’s call it LSM 1-5 — and to see which of our products we can cross-sell into that base,” Lesaka Southern Africa CEO Lincoln Mali tells the FM.

The listed fintech group revealed recently that it has agreed to take over local payments provider Adumo all goes according to plan, the purchase will be settled through the combination of about 17.3-million new Lesaka shares to be issued to Adumo’s shareholders, plus $12.5m from internal cash resources and external financing. This deal, along with other similar ones in recent years, is part of an ongoing effort to turn Lesaka — formerly known as Net1 UEPS — around and regain trust.

Net1’s image was tainted by a 2014 Constitutional Court ruling that its payments arm, Cash Paymaster Services, unlawfully secured a R10bn contract to pay social grants between 2012 and 2018.

Lincoln Mali: Acquisitions have to tick the right boxes. Picture: Freddy Mavunda

The company suffered huge losses after the contract was terminated in 2018 when it was challenged in court by one of the unsuccessful bidders, AllPay, which argued the tender process was irregular. The backlash led to an overhaul of the Net1 executive leadership and board in a bid to salvage its operations and position.

In the Net1 days, the group primarily served consumers, particularly its base of social grant recipients. Its new strategy focuses on growing its South African operations, having sold off its remaining stake in Liechtenstein-based Bank Frick and shut down its international payments unit. The group is made up of two main divisions: a merchant segment and a consumer segment. The consumer unit focuses on products such as unsecured credit, transactional banking and microinsurance through the EasyPay platform.

In February, the group acquired Touchsides, a data analytics and merchant services business, from beer giant Heineken for an undisclosed sum. That acquisition adds to the buyout of the Connect Group in April 2022 through a R3.8bn deal that expanded Lesaka’s footprint in the Southern African SMME sector.

The merchant unit makes up the bulk of earnings. With so much of Lesaka’s deal action having been around the merchant business, does it make sense to take a similar approach in the consumer segment? Or perhaps find a way to acquire a book with existing consumer customers? Could it be more prudent to grow that business organically?

Mali says the focus for Lesaka’s M&A activity will continue to be on growing the merchant offering. That said, the Adumo transaction comes with 245,000 customers, taking Lesaka’s consumer book to 1.7-million. The former Standard Bank executive says this deal will help the group explore consumers outside the grant space.

The financial performance has been excellent, with the acquisitions adding significant scale and solutions to the platform

Monde Nkosi

Adumo is South Africa’s largest independent payments processor and has been around for more than 20 years. The combined business will have more than 3,300 employees, service 119,000 merchants and process more than R250bn in throughput per year.

“Adumo Payouts and its customers will now come into the consumer division and then we’ll start to see how we take our products — the credit, the insurance and VAS — into that 245,000 or so customers,” Mali says. VAS refers to, among other things, buying electricity and airtime at a point of sale.

“It will help us to think of what other blocks of consumers in that space are available. But it’s not in the same way as how we see ourselves on the merchant side, as more of a consolidator. That’s why the emphasis of acquisitions will be more on the merchant side,” he explains.

Lesaka will continue to look for more acquisition targets. The recipe is simple.

“Those acquisitions have to tick a number of boxes. The first one is that they have to give us scale as an operator. That scale helps us. Whether it was Touchsides, Connect, Adumo, Kazang … you could see the scale that it brought,” Mali says. “The second one is that it should broaden our solution set that we can use across the group.”

In addition to growing the merchant and consumer base, Adumo adds to Lesaka’s geographic expansion — it will now have operations in five African countries: South Africa, Namibia, Botswana, Zambia and Kenya.

Lesaka’s latest acquisition will also have the effect of shaking up the group’s shareholder register.

Adumo’s ultimate shareholders include private equity player Apis Partners, African Rainbow Capital, the International Finance Corp and Adumo management. Given the new shares issued as part of the sale, the Adumo consortium will hold 21% of Lesaka, making it an influential shareholder. The group’s other large investor, Value Capital Partners (VCP), is certainly happy with the acquisitions to date.

“As engaged shareholders in Lesaka for the past few years, we are thrilled with the progress management has made on the strategy set by the board,” Monde Nkosi, investment director at VCP, tells the FM.

“The financial performance has been excellent, with the acquisitions adding significant scale and solutions to the platform, helping fulfil its potential as a natural consolidator and leading fintech platform in Southern Africa.”

The market also seems to approve of Lesaka’s moves. On the day of announcing the Adumo deal, the stock shot up 13%, adding to its year-to-date gains, now at almost 32%. This gives the company a R5.85bn market cap, at R89 a share. US-based B Riley Securities has a target price of $8 (about R147) on Lesaka. Two days after announcing the Adumo tie-up, Lesaka reported it had reduced its net loss in its third quarter to end-March, as revenue increased by 9% in local currency.

The group earns the majority of its money in rand, but reports in dollar.

It reported revenue of R2.6bn in the quarter to end-March from R2.4bn a year ago. Operating income stood at R15m from an operating loss of R33.2m at the same time last year. The group managed to reduce its net loss to R76.4m from R104.4m previously. The merchant division reported an 8% increase in revenue and the consumer division’s revenue was 19% higher year on year in rand. The company maintained its revenue guidance for the 2024 financial year at R10.7bn-R11.7bn, but raised group adjusted earnings before interest, tax, depreciation and amortisation guidance to R685m-R705m from the previously guided R625m-R685m.