PayPal is taking its biggest bet yet on point-of-sale transactions, small businesses, and markets outside of the US, as it looks to raise its game against Square, Stripe and others in the world of payments: the company has confirmed that it is buying iZettle — the Stockholm-based payments provider commonly referred to as the “Square of Europe” — for $2.2 billion in an all-cash deal.
The deal — which is expected to close in Q3 2018 — will see iZettle’s co-founder and CEO Jacob de Geer stay on leading iZettle. He will report to PayPal’s COO Bill Ready. Others in iZettle’s exec team will also stay on to run the business, which will become a “center of excellence” for in-store and offline payments in Europe, PayPal said.
The timing of the deal is notable: it comes on the heels of iZettle filing for an IPO earlier this month (just nine days ago, in fact) in its own bid to scale out its business: iZettle had planned to raise $227 million on the Stockholm Nasdaq exchange, which would have valued the company at around $1.1 billion.
From what I understand from sources, the two had been talking “for years”. I guess the IPO filing suddenly gave those talks a new kind of urgency. And maybe double so: the news was supposed to be announced on Friday but after rumors started to leak out today the company has decided to come out with it officially.
PayPal itself has a market cap of around $94 billion and in its last earnings said it had $7.8 billion in cash, cash equivalents and investments — giving it ample funds for this deal.
iZettle becomes PayPal’s biggest-ever transaction. For some context, in 2015 PayPal acquired money-transfer startup Xoom for $890 million, and when it was still a part of eBay, in 2013, it acquired Braintree and its Venmo business for $800 million.
iZettle has operations in 12 markets, including several in northern Europe and Mexico in Latin America where PayPal doesn’t have an extensive offline presence, such as Brazil, Denmark, Finland, France, Germany, Italy, Mexico, Netherlands, Norway, Spain and Sweden. (Its Latin American expansion was made by way of a strategic investment from the Spanish bank Santander.) iZettle is very strong also in the UK, so will help PayPal strengthen its business in that market at a time when Square has finally emerged as a competitor there.
Like Square, iZettle has made a lot of headway in building out a point of sale business by way of a card-reading dongle that links up with a smartphone or tablet, working with smaller businesses that might have never used a card service in the past because of the prohibitive costs of taking card payments. From that, it has extended into other financial services for those business, from inventory management to loans.
For those who follow PayPal, you’ll know that the company has also been working hard to expand its own point-of-sale payments, both in the US and globally, although some might argue that these have not been as much of a home run for the company as its legacy online payments operations.
iZettle’s deGeer has wanted to expand the company’s horizons in the future to encompass larger businesses and also companies that do not have brick-and-mortar presences of any kind, but it’s the size and reach of iZettle’s operations precisely in existing areas that was what attracted PayPal, as complements to its existing business.
“Small businesses are the engine of the global economy and we are continuing to expand our platform to help them compete and win online, in-store and via mobile,” said PayPal President and CEO Dan Schulman in a statement. “iZettle and PayPal are a strategic fit, with a shared mission, values and culture—and complementary product offerings and geographies. In today’s digital world, consumers want to be able to buy when, where and how they want. With nearly half a million merchants on their platform, Jacob de Geer and his team add best-in-class capabilities and talent that will expand PayPal’s market opportunity to be a global one-stop solution for omnichannel commerce.”
On the side of iZettle, this will give the startup a much bigger opportunity to scale out its business as part of a global payments giant.
“Combining our assets and expertise with a global industry leader like PayPal allows us to deliver even more value to small businesses to help them succeed in a world of giants,” De Geer said in a statement. “The combination of iZettle and PayPal will provide tremendous benefits to our merchants who will have access to an even wider range of tools to help them get paid, sell smarter and grow.”
In its IPO filing, iZettle noted that it’s still operating at a loss, although those losses appeared to be narrowing. In the first three months of 2018, the company reported negative earnings before tax, depreciation and amortization of SEK73 million ($8.3 million), slightly narrower than its negative Ebitda of SEK78 million ($8.8 million). It projects Ebitda profitability by 2020.
iZettle expects to generate gross revenues (its own cut, that is) of around $165 million in 2018, with approximately $6 billion of total payment volume expected to be processed on its platform, PayPal noted. Its revenues have been growing at a compound annual growth rate of 60 percent between 2015 and 2017.