Tyro confirms it is again in play: Westpac could be first to bid

Having recently knocked back a $1.27 per share indicative bid from Potentia Capital and HarbourVest, Tyro (ASX: TYR) has advised the market that it is again in play.

The Australian EFTPOS provider was up by as much as 8% at the open after advising the market it had received interest from several banks considering bids for the company, including Westpac Banking Corporation (ASX: WBC).

While none of these approaches are sufficiently definite or advanced to warrant further disclosure, management has entered “preliminary discussions with selected parties" to maximise value for shareholders.

Nothing may happen

"The approaches are non-binding and highly conditional in nature, and there is no certainty that a binding offer or a transaction of any kind will eventuate,” management noted.

While both National Australia Bank (ASX: NAB) and Commonwealth Bank (ASX: CBA) are also understood to have considered making bids for Tyro, Westpac is the only bank to confirm it has entered preliminary discussions with Tyro to acquire 100% of the business.

However, given that Tyro’s share price is down -61% over one year, banks that plan to bid for Tyro will never find a better time to do so.

Will Westpac be the first bank to bid?

Meantime, Westpac has advised the market that buying Tyro would strengthen the bank’s small business proposition, enabling it to better support customers and grow merchant acquiring, particularly in the hospitality and healthcare sectors.

Adding Tyro would also see Westpac eclipse rival CBA as the largest provider of payments terminals in the country.

Westpac is understood to have engaged investment bank JPMorgan to run a ruler over the Australian payment terminals business which sits just outside the S&P/ASX300 with a market cap of $829m.

One question for JPMorgan to consider is whether Westpac can acquire Tyro and retain the EFTPOS provider’s current alliance with Bendigo Bank.

What’s worth noting is that Tyro’s alliance with Bendigo Bank accounted for around15% of group volumes in FY22.

Recent developments

Tyro processed transactions worth $34.2bn last financial year and had 63,770 merchants on its books at June 30.

Today’s takeover revelations follows an uplift in FY23 guidance provided by management last week, including:

• FY23 operating leverage now guided to a mid-point of 82% (previously 85%)

• Earnings (EBITDA) before share based payments expense range of $28m to $34m (previously $23m to $29m).

First quarter highlights to 30 September included:

• $10.367bn in transaction value processed by Tyro merchants – up 59%

• 4,281 new applications received in the period (previously 3,659 new applications)

• Merchant loan originations of $32.7 million – up 116%

Tyro also announced that a cost reduction program targeting an $11m decrease in the annualised cost base was underway, with $5m in savings to be realised during FY23.

What brokers think

Consensus on Tyro is Hold.

Based on Morningstar’s fair value of $3.11 the stock appears to be undervalued.

Based on the five brokers that cover Tyro (as reported on by FN Arena) the stock is currently trading with 6.2% upside to the target price of $1.67.

Following a 1Q update announcing a new cost-out plan and raising FY23 earnings (EBITDA) guidance by around 19%, Morgans raises its target to $1.99 from $1.70, and retains an Add rating.

Given macro conditions and potential for competition to intensify, Macquarie remains cautious on Tyro and retains a Neutral rating with the target price increasing to $1.50 from $1.20.

Tyro Payments share price movements today