JSE- and Nasdaq-listed Net1 UEPS Technologies has agreed to buy South African fintech company Connect Group for R3.7-billion in a blockbuster deal that it has described as “transformational” for its business.

In a statement, Net1 described Connect Group as a “profitable, high-growth and leading South African fintech” and said the acquisition will help it to become “South Africa’s leading fintech platform”.

Connect Group, which is led by CEO Steven Heilbron, was founded in 2006 and provides fintech solutions to about 44 000 small, medium and micro enterprises (SMMEs) in Southern Africa, many of which are in the informal sector.

The company offers four main product lines: a prepaid value-added services platform branded Kazang; a digitised cash management platform called Cash Connect; a merchant lending platform branded Capital Connect; and merchant acquiring solutions called Kazang Pay and Card Connect.

Net1 said Connect Group is well positioned to grow into its “large addressable market”, which it estimates at about 700 000 formal SMMEs and about 1.4 million informal SMMEs in South Africa.

“Our vision is to transform Net1 into the leading South African fintech platform, offering payment processing and financial services to underserved merchants and consumers. The acquisition of the Connect Group transforms our merchant offering, SMME footprint and growth trajectory, while also positioning us to be the South African market leader serving both merchants and consumers,” said Net1 CEO Chris Meyer in a statement on Monday.

Retention scheme

Connect Group reported net revenue of R1.1-billion in the year to end-February 2021, producing an historic three-year compound annual growth rate of about 30%, Net1 said.

A retention scheme is being put in place for key Connect Group employees, in terms of which Net1 will grant about 1.3 million shares of restricted stock to the employees, which will vest in three equal tranches on the first, second and third anniversaries of the closing of the acquisition.”

Also, the parties have agreed that the purchase price will be reduced on a “rand-for-rand basis by the amount by which the actual Ebitda, as defined in the transaction documents, is lower than the expected Ebitda of R375-million for the financial year ending 28 February 2022”. (Ebitda is a measure of operational profitability.)

Net1 will fund the deal through R2.35-billion in debt (R1.1-billion in a five-year term facility and R150-million general banking facility that replaces the Connect Group’s existing debt facilities). and R1.1-billion in 18-month bridge facilities secured against Net1’s assets.

There is also a deferred consideration of R350-million to be settled through the issuance of 3.1 million Net1 shares of common stock at an issue price of US$7.50/share and payable in three equal tranches on the first, second and third anniversaries of the transaction closing.