Is another takeover bid likely for Cannon–Brookes backed Tyro?

Most people have probably never heard of the fintech Tyro Payments, but there’s every chance they have used its eftpos terminals at a restaurant, cafe or retailer.

Tyro is the fifth-largest provider of payment services behind the big-four banks, with more than 63,000 merchant customers who use it to accept payments on debit and credit cards, or for Medicare or private health fund claims.

Tech billionaire Mike Cannon-Brookes is backing Tyro Payments.Credit: Kathleen Adele

Counting technology billionaire Mike Cannon-Brookes as its biggest shareholder, Tyro competes with industry giants Commonwealth Bank, Westpac, National Australia Bank and ANZ Bank in payments.

It is taking on the major banks a time of major change in how we pay for things: consumers have dumped cash in favour of electronic payments, and increasingly, online shopping. This is creating increased opportunities for new players.

However, it has been tough going for Tyro shareholders who bought into the company’s sharemarket float in late 2019: the stock is trading well below its listing price.

Months after Tyro began trading on the Australian Securities Exchange (ASX), the COVID-19 pandemic unleashed havoc on world markets. The company also suffered a major outage last year, while rising interest rates have further wounded its share price – along with many other growth technology companies.

This month, Tyro’s board rejected what it said was a “highly opportunistic” non-binding takeover offer from a consortium led by tech-focused private equity firm Potentia Capital, but the bid has conditional support from Cannon-Brookes, who owns 12.5 per cent of Tyro shares.

Cannon-Brookes’ investment company Grok Ventures said it could support another offer – if one emerged – that was 25¢ a share higher than the current bid. The tech billionaire’s apparent willingness to sell has effectively put Tyro in play.

How it started: Tyro was founded in 2003 by entrepreneurs Paul Wood, Peter Haig and Andrew Rothwell as a specialist provider of electronic payment services to merchants. The company expanded into banking in 2016 when it gained a licence to take deposits.

Tyro listed in December 2019 in the largest initial public offering by market capitalisation on the ASX that year.

While it has traditionally focused on in-store payments, the company has also moved into e-commerce, and offers loan and transaction accounts to business clients.

Mike Cannon-Brookes’ Grok Ventures conditionally accepted a private equity offer for Tyro Payments.Credit: Dhiraj Singh

How it’s going: Tyro is growing, but the market is not rewarding that growth with a higher share price. The company’s stock has fallen about 70 per cent in the past year.

At its latest results, Tyro said the value of transactions it processed rose by one-third in the year to June, but it was still a tough year, as COVID-19 lockdowns restricted in-person spending and fintech shares slumped.

The company reported a statutory loss of $29.6 million, vowing to rein in costs and raise fees as it seeks to move into the black. Against this tough backdrop, private equity firm Potentia Capital lobbed a non-binding proposal to buy Tyro for $1.27 a share earlier this month.

Industry: Payments

Main product: Eftpos services

Key figures: Chief executive Jon Davey, chairman David Thodey

The bull case: Some investors are convinced there is higher takeover bid coming for Tyro, as its shares have been trading higher than Potentia’s $1.27 offer.

JP Morgan analyst Bob Chen said in a recent research note the “highly opportunistic” offer from Potentia “leaves room for further bids to come.”

Chen points out Tyro has built market share of about 10 per cent in its core industries, and he says it’s a good time to be challenging the big-four banks, given the problems they have had with outages. There is also an argument that payment firms can grab a slice of the lucrative market for business loans by using their transaction data to help with lending decisions.

The bear case: Payments is a low-margin business, so scale is crucial.

Tyro faces powerful competitors in the major banks, and increasingly, technology giants such as Block, the US firm that bought Afterpay and owns Square, which provides simple-to-use terminals often seen in small businesses.

CLSA analyst Elijah Mayr said in a research note last month that 2022 would be “as good as it gets” for Tyro. He cited factors including slowing in-person spending growth and heightened competition from both domestic and institutional players.

Another risk is that rising inflation could prompt consumers to curb their discretionary spending at such outlets as at cafés and restaurants, where Tyro has many eftpos terminals.

As reflected in Tyro’s poor share price performance this year, loss-making tech stocks also tend to struggle when rates rise sharply.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.