8-K: i3 Verticals to Sell Merchant of Record Payments Business to Payroc for $440 Million

i3 Verticals has agreed to sell its merchant of record payments business to Payroc for $440 million in cash, marking a strategic shift towards vertical market software.

Summary

• i3 Verticals has entered into a definitive agreement to sell its merchant of record payments business, including its proprietary technology, to Payroc for $440 million in an all-cash transaction.
• The sale is subject to customary closing conditions, including regulatory approvals, and is expected to close in i3 Verticals' fiscal fourth quarter.
• The divested business includes two non-core assets from i3's Software and Services segment related to the Non-profit and Property Management vertical markets, representing approximately $4 million in annual adjusted EBITDA.
• Following the divestiture, i3 Verticals will focus on its vertical market software business, primarily in the Public Sector, Education, and Healthcare markets.
• The company expects to use the proceeds from the sale to pay down debt, potentially eliminating all or nearly all of its 2023 Senior Secured Credit Facility.
• After reducing its debt, i3 Verticals anticipates a 1% reduction in its borrowing rates under its existing credit facility until its Consolidated Total Net Leverage Ratio reaches 2x.
• The remaining business will be approximately 75% software and related services revenue, and 25% payments and other.

Sentiment

Score: 8

Explanation: The document conveys a positive outlook with a clear strategic direction, a strong financial position post-transaction, and a focus on core business. The language is optimistic and forward-looking, indicating a positive sentiment from an investment perspective.

Positives

• The sale will simplify i3 Verticals' business, allowing it to focus on its core vertical market software solutions.
• The company's balance sheet will be significantly strengthened by paying down debt.
• The reduced debt will lead to lower borrowing rates and increased financial flexibility.
• The transaction will provide significant capital for future mergers and acquisitions.
• i3 Verticals will retain its payment facilitation platform, allowing it to attach payments to its vertical software solutions.

Negatives

• The divestiture includes two non-core assets from i3's Software and Services segment related to the Non-profit and Property Management vertical markets, representing approximately $4 million in annual adjusted EBITDA.

Risks

• The transaction may not be completed in a timely manner or at all due to unsatisfied closing conditions.
• There is uncertainty regarding the timing of the completion of the transaction.
• The transaction could be terminated due to unforeseen events or changes.
• The divestiture could disrupt management's attention from ongoing business operations.
• There are post-closing risks related to the ancillary agreements to be entered into.
• The company's ability to execute its strategy and achieve its goals after the transaction is not guaranteed.

Future Outlook

i3 Verticals will focus on its vertical market software business, primarily in the Public Sector, Education, and Healthcare markets, and will have a stronger balance sheet and increased financial flexibility for future growth and acquisitions.

Management Comments

• Greg Daily, Chairman and CEO of i3 Verticals stated, 'This is a key strategic moment for our Company. After the divestiture, we will be a pure vertical market software business focused entirely on the Public Sector, Education and Healthcare markets.'
• James Oberman, Chief Executive Officer of Payroc stated, 'The i3 merchant business is an ideal fit for Payroc, and their values and goals align with ours.'

Industry Context

This transaction reflects a trend of companies focusing on core competencies and divesting non-core assets. i3 Verticals is shifting from a payments business to a pure vertical market software provider, aligning with the growing demand for specialized software solutions in specific industries. Payroc's acquisition strengthens its position as a leading omni-channel payments provider.

Comparison to Industry Standards

• The sale of a payments business for a significant cash amount is a common strategy for companies looking to streamline operations and focus on core competencies, similar to other divestitures in the tech and financial sectors.
• The valuation of $440 million for the merchant of record payments business is within the range of comparable transactions in the payments industry, though specific multiples would require more detailed financial information.
• The strategic shift towards vertical market software is a trend seen in other tech companies, as specialized software solutions often command higher valuations and recurring revenue streams.
• The use of proceeds to pay down debt is a common practice to improve financial health and reduce risk, similar to other companies undergoing strategic restructuring.

Stakeholder Impact

• Shareholders will benefit from a stronger balance sheet and a more focused business strategy.
• Employees in the divested business will transition to Payroc.
• Customers will experience a change in ownership of the merchant of record payments business.
• Suppliers and partners will need to adapt to the new ownership structure.

Next Steps

• The transaction is subject to closing conditions, including regulatory approvals.
• The closing is expected to occur sometime in i3 Verticals fiscal fourth quarter.
• i3 Verticals will focus on its vertical market software business.
• The company will use proceeds to pay down debt and explore future M&A opportunities.

Key Dates

Keywords

merchant of record payments, payments business, vertical market software, divestiture, Payroc, i3 Verticals, acquisition, debt reduction, software solutions, financial transaction