What Is Fintech? The Curious Case of a Post-Covid Acquisition
The global pandemic has laid waste to the world economy, and one set of casualties of the steep global recession has been a large swathe of acquisitions that were agreed to prior to the Covid-19 crisis. These transactions were scuttled by the acquirer simply because the post-pandemic value of the company no longer justified the pre-pandemic negotiated price.
In two high-profile deals that recently fell apart--Sycamore Partners’ acquisition of Victoria’s Secret and Softbank’s planned $3 billion investment into WeWork--the companies being acquired were already in a modicum of financial trouble and the pandemic caused their revenues to virtually disappear, as people stopped going to malls or working in offices.
However, another acquisition where the company being acquired has similarly bleak current and future prospects still appears to be on track. The company in question is Global Blue, which helps foreign tourists get their VAT refunds in Europe.
The acquiring entity is called Far Point, an acquisition company set up specifically to acquire a fintech. Daniel Loeb, CEO of the investment firm Third Point, controls a 25% stake.
The rules governing special purpose acquisition ventures like Far Point require that a majority of shareholders approve the acquisition, and that the company make an acquisition within two years of its formation, which Far Point is approaching.
Since European tourism has almost ceased, so has Global Blue’s revenue, and the company recently laid off a sizable fraction of its staff. Global Blue has not offered Far Point’s shareholders any guidance at all regarding future revenue, citing the uncertainty over the course of the pandemic and its impact on tourism.
Despite its lack of revenue the acquisition may yet take place: Loeb has pledged to vote his 25% share in favor of the merger and Silver Lake, the investment firm that owns Global Blue, has purchased 12% of the stock in Far Point and will vote in favor of the merger as well.
However, few other Far Point Shareholders will likely join them in voting for the acquisition, which does not make any financial sense at the pre-pandemic price that is currently on the table. In fact, it may not make much sense at any price.
The company faces three problems: The first is that it is not a fintech company. It receives paper receipts along with filled out paper forms that it must process in a labor-intensive processing center in Slovakia. Unlike the real tech company, its business model is not very scalable: if it increased market share it would have to hire more people to help process the receipts.
The second problem is that even though it has only one major competitor at the moment, it is in a very competitive market. Its F-4 filings suggest that while its revenue has grown steadily the last few years, its profits have stayed flat. It appears that this profit stasis owes to the fact that European retailers are demanding more of a share of the VAT refund in order to give Global Blue their business.
If a consumer purchased clothes that included 100 Euros of VAT taxes while on their European vacation, getting some of that money back is akin to an unexpected treat, and they do not realize that much of their refund is consumed via transaction costs.
Global Blue extracts 35 percent of the VAT refund, and it returns a significant portion of that to retailers to secure contracts for them to hand out their form. It then adds a hefty foreign exchange fee on the balance to be refunded before crediting what’s left to the consumer. If the consumer wants to receive their refund on an e-wallet such as AliPay (ANT Financial is an investor in the Far Point SPAC) Global Blue charges an additional fee.
The last problem is that the business model itself may be broken and prone to becoming completely undone by a true fintech company that figures out how to eschew paper and create a way for consumers to obtain their VAT refunds via an app from the company of their choice. When such an eventuality does occur, it will threaten the very viability of Global Blue’s business model. (The pandemic and virtual cessation of travel may have already done such a thing: its F-4 also notes that the Covid-19 may jeopardize its very viability as an ongoing enterprise.)
Even if a tech disruptor does not appear soon this business model is shaky: EU law permits consumers, and not the store, to choose the refund operator of their choice. Hence, retailer contracts secured by increasing revenue share won’t be sufficient to preserve Global Blue’s business model because these come at a cost to the consumer.
Despite being the dominant VAT refund operator for almost thirty years, Global Blue reports a paltry 39 percent success ratio, which is the percentage of transactions successfully processed.
Global Blue is a company using a non-scalable technology to eke out stagnant profits in a competitive market that’s susceptible to being destroyed by technology if the pandemic doesn’t do it first. It’s not only not a fintech, but it doesn’t appear to be a business model poised to succeed in the long term.
That its acquisition may still occur at a price close to what was agreed to before the pandemic is astounding.
