$888 million takeover of OzForex
OzForex just announced that it has received a takeover proposal from Western Union at $3.50 – $3.70 per OzForex share. This values OzForex at up to $888 million or the equivalent of nearly 33x market forecast earnings for FY2016.
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When OzForex floated two years ago at $2.00 per share, it was valued at 22x forecast earnings. Even at that price, many in the market were worried it was a very expensive valuation. So why would Western Union be prepared to pay cash to potentially takeover OzForex at a 50% higher earnings multiple compared to the time of the IPO?
More importantly how do we find the next OzForex for investment?
OzForex has delivered strong financial growth (e.g. earnings grew 21% in FY2015) but we think the following factors are really the key to OzForex’s valuation and also how to identify the next OzForex-like company for investment.
1. Leading edge & user friendly technology
Not that long ago, transferring money from one country to another usually meant waiting in line at a bank and filling in a number of paper forms. After that, the bank would still charge typically high fees and commissions for the transfer. In fact, many banks still operate in this fashion.
OzForex changed this by building a simple to use online currency transfer site which is user friendly, fast and low cost. As a result, it has managed to build a 150,000 active customer base who together transact over $17 billion a year. The user friendly nature of OzForex’s site also means customers are relatively loyal.
This combination of leading edge and user friendly technology has been the key to OzForex’s success in growing its customer base and the resulting financial success.
2. Huge global growth opportunity
The global payments industry is a $2 trillion industry where traditional banks have 80%-95% market share depending on the region of the world. As a result, nimble non-bank providers such as OzForex have a tremendous opportunity to continue taking business away from banks.
Acquiring OzForex makes sense for Western Union who are trying to actively grow their online money transfer business to supplement the company’s global network of 500,000 service locations. Buying OzForex at 33x earnings valuation might prove to be a bargain if Western Union can successfully incorporate OzForex into its global offering and gain a bigger market share within the global payments industry.
Where can we find the next OzForex?
Using the above 2 criteria, there are very few companies listed in Australia which would qualify. The major listed industries in Australia simply do not have the characteristics of leading edge user friendly technology combined with global growth opportunities.
For example, while the Australian banks have improved on the customer technology front, they do not offer substantial growth opportunities outside of Australia. On the other hand, resources shares did once provide great global growth exposure but that boat has certainly sailed.
We think international shares will be the most likely place to find the next OzForex. Here are a couple we quite like:
Expedia – Expedia is one of the world’s leading online travel companies owning brands such as Expedia.com and Hotels.com. The company is the epitome of leading edge user friendly technology having been one of the pioneers of online travel booking. Nearly 60% of all global travel is still booked offline providing Expedia with very high global growth opportunities. Currently, Expedia’s shares trade at 20x FY2016 price earnings ratio with earnings forecast to grow by over 46% over the same period.
Fitbit – We recently wrote at length about Fitbit. This company also fits well within the OzForex mould. It has developed activity trackers with cutting edge technology that is very easy for all customers to use. In terms of market opportunity, strong evidence suggests the activity trackers market is set for further growth. Currently, Fitbit shares trade at 26x FY2016 price earnings ratio with the market expecting earnings growth of 85% in FY2015.
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