Does PayU’s Acquisition Of BillDesk Signal Consolidation In The Payments Sector?

The Indian fintech space saw one of the largest deals in recent years as PayU announced that it will be acquiring payment gateway BillDesk. PayU will be acquiring control of BillDesk for $4.7 billion, with each of BillDesk’s founders receiving around $500 million through the sale.

PayU is owned by Prosus, a subsidiary of Naspers, which serves as a holding company for Naspers’ international digital assets. The BillDesk acquisition fits in with PayU’s strategy of growing by acquiring companies. Its businesses in Colombia and India, its most active markets, have grown through acquisitions.

Pagos Online was a Columbian payments company that was acquired by PayU to grow its Columbian operations. Similarly, it also acquired Citrus Pay in India to augment its payments business in 2016. It then went on to acquire Wimbo and PaySense in 2019 and 2020 respectively.

BillDesk has so far proved to be the anti-thesis of the startup environment in India. BillDesk had entered the ‘fintech’ space long before the term was coined. Its founders were in their late 20s and early 30s then, unlike much younger founders of today. It was founded in 2000 and received its first venture investment from SIDBI Venture Capital and Bank of Baroda. Both of them are government-run companies that are a far cry from the glitzy world of venture capital today.

Unlike today, capital was scarce and startups struggled to raise external funding. The pressure to become self-sufficient led the company to become profitable, unlike other startups in the fintech space who continue burning cash to generate profits.

BillDesk’s first-mover advantage has allowed it to corner almost 50 per cent of the market. It facilitated around $91 billion worth of online transactions in 2021. BillDesk controls a major share of the market for payment processing for government agencies. With utilities and other government agencies on board, the company does not face cyclical changes unlike other businesses.

BillDesk also provides services to multiple companies in the financial sector. PayU which has so far focused on the Internet segment has been losing share to new competitors and has been displaced from the top spot. The BillDesk acquisition can help diversify beyond the Internet payments business and grow.

Over time, the fees per transaction have continued falling for payment gateways. Therefore, with their fixed cost structure, it is important for payments companies to have high volumes of transactions to generate profits. In recent years, multiple players have entered the segment which could result in lower volumes for each player. With multiple new entrants still making losses, it is likely that the sector will continue consolidating further.

According to reports, BillDesk’s investors and founders have been looking to exit the business since the past few years. Though it had been selling minority stakes, BillDesk had been looking for investors to buy the entire company.

BillDesk has maintained focus on payment gateways while other fintechs like Google Pay, Paytm, BharatPe and MobiKwik have focused on customer-facing segments that require substantial expenditure to attract users, resulting in high cash burn. With the increasing need for scale, companies might opt for merger and acquisitions and the BillDesk acquisition might signal the beginning of the consolidation phase in the sector.

BillDesk generated revenues of around $231 million and profits of around $35 million, which translates into a price to sales ratio greater than 20. The high premium paid by PayU possibly takes into consideration BillDesk’s dominating position and the strong growth expected in the coming years as more users shift to online payments. The deal comes at a time when technological startups are listing on the stock exchanges and are commanding valuations as high as 40 times sales, without turning a profit in their entire lifetime.

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 valuations seem fair from PayU’s perspective. For the founders, the acquisition saves them from the hassles of finding an investor or listing BillDesk on the stock exchanges.

With BillDesk’s acquisition, PayU will now command around $147 billion of total payments value, which would elevate it to the league of the top payment companies in the world. Both businesses appear to complement each other as BillDesk caters to old economy businesses and PayU caters to new-age technological companies. The deal would be the second-largest in the Internet space after Walmart’s buyout of Flipkart.