JSE and Nasdaq-listed Net1 UEPS Technologies is buying Fintech player Connect Group for R3.7 billion. The acquisition of the Connect Group, a profitable, high-growth and leading South African FinTech company, is transformational for Net1 in its journey to becoming South Africa’s leading FinTech platform.
“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, MSME footprint and growth trajectory, while also uniquely positioning us to be the South African market leader serving both merchants and consumers,” said Chris Meyer, Group CEO of Net1.
“Further, Connect Group advances our mission of financial inclusion by bringing into the Net1 fold a base of 44,000 micro, small and medium enterprises (MSMEs”), many of whom are informal businesses. We welcome the Connect Group’s high-caliber team to Net1 and are confident that the combined group will significantly exceed the sum of the parts.”
Founded in 2006, the Connect Group is a profitable, high-growth and leading provider of financial technology solutions to nearly 44,000 MSMEs in Southern Africa. As at February 28, 2021, the Connect Group’s customer base includes more than 8,600 formal MSMEs and over 35,000 informal MSMEs.
The Connect Group delivers four main product lines to its customer base under well-established and respected brands:
• A prepaid value-added services platform branded Kazang;
• A digitized cash management platform branded Cash Connect;
• A merchant lending platform branded Capital Connect; and
• Merchant acquiring solutions branded Kazang Pay and Card Connect.
“As a standalone business, Connect Group has become one of South Africa’s fastest growing FinTech businesses serving MSMEs,” said Steven Heilbron, CEO of the Connect Group.
“Having spent a lot of time with the Net1 management team and directors over the last year, I believe that the combined management teams of the Connect Group and Net1 will work very well together.
“I am very confident that this transaction fast tracks the combined businesses which together, now has the essential and differentiated building blocks required to deliver on the focused objective of being the leading South African FinTech platform. We believe that this transaction will create distinct field advantages and will take the group to heights that neither entity would achieve alone.”
Taken together, the Connect Group is a unique full-service provider – across cash and digital – of financial and value-added services to formal and informal MSMEs in Southern Africa.
Net 1 believes that the Connect Group is very well positioned to grow into its large addressable market, which is estimated at approximately 0.7 million formal MSMEs and 1.4 million informal MSMEs in South Africa.
The Connect Group has reached significant scale and continues to grow swiftly.
In its last financial year ended February 28, 2021, the Connect Group grew earnings before interest, depreciation and amortization (EBITDA) by approximately 30% on the prior year, notwithstanding the significant impact of COVID 1st wave level 5 and 2nd wave level 3 lockdowns on the SA economy and MSME segment that it serves.
The Connect Group settled cash of R79.5 billion ($4.8 billion) through its retail cash vault infrastructure, sold ZAR 13.2 billion ($799.4 million) of value-added services through its point-of-sale (POS) terminals and digital wallets, advanced over R280 million ($17.0 million) in growth capital to SME businesses, and processed R2.6 billion ($157.5 million)
in card transactions through its POS terminals. This resulted in net revenue of R1.1 billion ($66.6 million), which represents a historic three-year compound annual growth rate of approximately 30%.
Net1 has previously communicated its vision to transform into the leading fintech platform for underserved consumers and merchants in South Africa.
The acquisition of the Connect Group significantly advances that vision and is transformational for Net1.
The combination of Net1 and the Connect Group is strategically important for the following reasons:
- Combining complementary product offerings to drive stronger unit economics: the Connect Group fills four key gaps in Net1’s product offering, namely the provision of value-added services directly to MSME’s, digitized cash management, merchant acquiring and merchant lending. On the other hand, Net1 brings issuing, insurance and consumer financial services infrastructure to the Connect Group. Offering multiple products to a single customer reduces churn, increases take-rate and improves unit economics.
- Expansion of addressable market to informal MSMEs: while Net1 has an established
presence amongst formal enterprises, it does not currently serve any of South Africa’s estimated 1.4 million informal MSMEs. Connect Group serves over 35,000 informal MSMEs and is a leading provider of financial services to this growing customer segment.
- Attractive financial profile with strong and profitable growth: the Connect Group has
delivered exceptional historical growth in throughput, revenue, earnings and free cash flow. Further, there is significant room for continued growth, supported by secular tailwinds.
- Merging highly skilled teams with complementary expertise: the Connect Group has a proven track record of successfully launching and commercializing innovative financial solutions and a demonstrated ability to successfully integrate with new operating groups.
- Better serving the underserved: Net1 and the Connect Group are united by their commitment to provide dignified financial services to people and businesses who are underserved by the financial system. Net1’s base of more than one million retail customers and the Connect Group’s base of over 44,000 MSME customers are underserved by traditional financial services.