Shift4’s M&A Alchemy

It’s been just over two years since I first wrote up Shift4. With founder/CEO Jared Isaacman departing for NASA and the company acquiring Global Blue for $2.5bn in its largest M&A transaction by far, I figure it’s time for an update.

To quickly recap: in its first decade, United Bank Card, the fledgling business Jared founded in his parent’s basement in 1999, sustained itself by re-selling, mostly to small bars and restaurants, point-of-sale systems and card terminals produced by others, with TSYS processing payments on the back-end. Following the 2008 acquisition of HarborTouch, UBC began offering its own POS software and embedding business management applications, pioneering a model that would later be popularized by Square and Toast. But while it marketed itself as a full-service POS provider, the company still relied on TSYS to process the actual payments. This dependence would start to be severed after the acquisitions of Shift4 (2018) and Merchant Link (2020), independent payment gateways that carried Shift4 (as UBC was later renamed) beyond restaurants, into the complex environments of hotels and casinos. As I explained in my previous post:

You can think of a gateway as middleware that collects payment information from the card, encrypts it, tokenizes it, then sends it down to a legacy merchant acquiring processor like First Data or Worldpay. The payments gateway for, say, a casino resort is embedded in dozens of software systems, from the MICROS POS used by the restaurant to the Microsoft Dynamics POS used by the gift shop or spa. It creates a token that updates the original payment authorization as a guest transacts at different venues inside the property so they can get a single bill at the end of their stay, and delivers to the casino resort a consolidated reconciliation of transaction activity across all their software systems. With more than 500 software integrations, Shift4 acts as the connective tissue that organizes payments data across the disparate software systems that a complex hospitality operation might use to accept payments across different parts of their business.

Caesar’s, for instance, deploys 40 different types of software from a dozen or so different vendors across the spas, restaurants, hotels, and parking garages of its casino resort complex. Shift4 acts as a middleman that consolidates payments data across that sprawl.

But it was earning a meager 3c-5c per transaction for all that heavy lifting while the merchant acquirers (like First Data and TSYS) sitting behind them clipped 40bps-100bps of transaction value, realizing 4x more gross profit dollars for the easier task of communicating with card networks and settling funds. This hardly seemed fair. So Shift4 began claiming the downstream payment processing piece for itself, even waiving gateway fees and subsidizing new POS hardware for clients who terminated relationships with incumbent merchant acquirers. End-to-end volumes (the dollar value of transactions that Shift4 intermediated as both a merchant acquirer and gateway) ballooned from $16bn in 2018 to $70bn by 2022, with ~$150bn of gateway-only volume left to convert.

When I first stumbled upon the company, Shift4 was in the early stages of replicating this playbook in other verticals, acquiring targets at attractive multiples and sacrificing software pennies for payments dollars. Through M&A, Shift4 could effectively buy merchant customers for just ~$3k per location (including the cost of conversion “carrots”, like hardware subsidies, signing bonuses, reduced subscription fees, and other perks that reduce the total cost of ownership for customers), a fraction of the ~$15k that Toast was paying to do so organically.

As it embarked on this journey, Shift4 announced the launch of SkyTab, a modern point-of-sale system that subsumed legacy offerings from companies acquired a decade earlier. Meanwhile, in markets with strong demand, the company acquired ISOs, resellers who carried Shift4 alongside solutions from competing vendors, thereby converting third party contractors with split loyalties to a dedicated in-house salesforce, swapping the considerable variable cost of commissions (40% of recurring sales) for leverageable fixed costs of salaries in the process¹. In 2021, Shift4 pushed into sports stadiums through the $72mn acquisition (6x revenue) of VenueNext, a mobile ordering technology, seeded by the San Francisco 49ers in 2014, that sits behind the smartphone apps developed by the stadium venues that fans use to buy merchandise and order food and drinks to their seat. Prior to the transaction, VenueNext’s revenue was made up entirely of SaaS subscription fees. As with the gateway acquisitions, Shift4 blew up that legacy software revenue model and replaced it with a take rate on payments flow², winning over a number of venues who valued the convenience of dealing with a single vendor. Domestic acquisitions interdigitated with two chunky international ones – Online Payments Group ($126mn) and Finaro ($575mn), European e-commerce PSPs that supported local payment methods, online and offline, laying the groundwork for omnichannel capabilities critical to merchants, like SpaceX and Hilton, whose footprint stretches across multiple regions.

A lot has happened in the intervening years. Shift4 has been cross-selling SkyTab to VenueNext customers, including the Orlando Magic arena and the Dallas Cowboy’s AT&T Stadium. Through integrations with three major ticketing platforms (SeatGeek, Ticketmaster, and Paciolan), VenueNext can now process ticket transactions – which bring in 4x more payment volume per customer than concessions alone, with higher take rates to boot – on behalf of its stadium customers. And by linking ticketing transactions to food and merchandise purchases made inside the stadium, Shift4 can provide better analytics around the fan experience than a venue, with data fragmented across multiple vendors, can on its own (this is analogous to how Shift4, by acting as the gateway middleman, can consolidate transaction data across the dozens of software systems used across a casino resort).

Before it was acquired, VenueNext was breaking even on just $12mn of revenue. Under Shift4’s ownership, net revenue ballooned by 7x over the next 3 years, compressing the purchase multiple down from an ostensibly pricey 6x to under 1x…and that’s with just 150 of VenueNext’s 750 venues having transitioned to the payments-based revenue model (as of September ‘23) and only a handful relying on VenueNext to process primary ticket sales. Shift4 was kicking so much ass that after VenueNext was purchased, SpotOn, the owner of Appetize, then the dominant payments company in the stadium vertical and VenueNext’s primary competitor, reached out to see if Shift4 would buy the business off them. Shift4 agreed, purchasing Appetize for $110mn, ~1/4 of what SpotOn had paid for it in 2021. Management proceeded to migrate Appetize’s 600+ clients to VenueNext’s platform and, once again, substituted the target’s hardware and software revenue for a piece of the payments flow. Just a year later, this once cash hemorrhaging business was run-rating at $15mn of EBITDA.

Shift4 then ported the strategy that had worked so well at VenueNext to several retail POS targets. When it was purchased in April ‘23, Focus POS was just another small vendor in a crowded space, doing $4.7mn of EBITDA on $7.5mn of revenue. On the surface, it was not worth more than the 10x EBITDA Shift4 paid for it. But Focus derived all its revenue from software license and hardware sales, leaving untouched the $15bn of payments flow generated across its 10k merchants. In just a few months, Shift4 converted 10% of that volume to its own payment platform and began earning points on the package. In just over a year, Focus POS was delivering 3x more recurring revenue than it had just prior to being acquired.

The same commercial logic motivated management’s $250mn (~10x EBITDA) purchase of Revel POS last year. Revel was a cash burning POS vendor, once valued at over $500mn, that monetized through software and intentionally left payments volume across its 18k merchants unmonetized for most of its 15-year history. As with Appetize, Shift4 deleted the Revel product org³, slashed costs, flipped the asset to profitability, and began converting the merchant base to SkyTab. Soon after Revel, Shift4 quietly paid $115mn for Canada-based POS vendor Eigen Payments, synergizing the initial purchase multiple of 10x EBITDA down to just 3x through the same software-for-payments motion.

As much traction as SkyTab has gotten in North America, demand for modern POS systems may be even more underserved in Europe, where merchants are still largely running Windows-based POS systems from the early 2000s, with those systems often untethered from payment terminals. In pursuit of that opportunity, Shift4 acquired a 75% stake in Vectron, a break-even POS vendor with market-leading 25% restaurant POS share in Germany and a “large presence” across Europe. Should it act on its intention to acquire the rest, Shift4 will be paying ~€85mn (~2x revenue) for a captive base of 65k merchant locations doing ~€25bn of payments volume, with ~300 independent dealers providing distribution. The €85mn purchase price amounts to €1,300 per merchant, which combined with €1,200 of conversion costs (dealer bonuses + free hardware) yields a fully-loaded CAC of €2,500 that management thinks can be paid back in less than 18 months as, once again, SkyTab is rolled out and the payments stream is monetized.

In addition to buying competing POS vendors, Shift4 is also going after merchant payment volumes from more oblique angles. Last August, Shift4 acquired GiveX, a founder-run provider of gift card and loyalty offerings based out of Toronto. With an overall customer churn rate of less than 3%, this is evidently a very sticky business, as gift card transactions are tightly coupled to point-of-sale systems and loyalty offerings are informed by hard-to-replicate transaction data for each customer going back many years. Those embedded products give Shift4 a foot-in-the-door to 130k merchant locations, to whom it can cross-sell SkyTab and monetize some portion of the ~$300bn of revenue generated across them. At the same time, the gift cards and loyalty programs from GiveX will be bundled into SkyTab, priced attractively, and cross-sold to Shift4’s existing merchants.

To be clear, the $300bn figure represents total revenue generated by GiveX’s merchants, not the gross transaction volume pertaining to GiveX’s products specifically. That management references the $300bn as if it were equivalently addressable to the payment volumes obtained through its acquisitions of POS vendors (or even payment gateways) is a bit misleading, as a rewards provider would have a much harder time convincing its merchant clients to re-platform on a new POS than the existing POS vendor would have convincing its merchant clients to stick with them. That is, I can understand why the vendor of a POS system, which captures the merchant’s transaction data, and a payment gateway, which integrates across disparate software in a complex environment, would be advantageously perched to monetize payments flow. But I don’t see the product rationale for why a gift card and loyalty provider would be. A POS system is the center of gravity for merchants and exerts more pull than any ancillary feature that plugs into it. Moreover, gift cards and loyalty programs are horizontal products and, as such, they integrate with any number of POS systems. That GiveX is now in the clutches of a single POS vendor as part of a vertically integrated offering compromises that agnostic position. How would you feel if you sold a POS that integrated with GiveX and GiveX’s owner began reaching out your merchants to replace your POS with their own?

Having said all that, prior to being acquired, GiveX had been trying to cross-sell its own POS system to gift and loyalty customers for at least the previous 5 years, pitching a similar gift/rewards and POS combo, managed on a single cloud-based platform. A microcap with ~C$80mn of revenue, GiveX managed to grow POS transaction volume from C$518mn to C$1.9bn between 2018 and 2023 while remaining profitable throughout, suggesting that gift/rewards does in fact offer a valuable side door to bigger POS engagements. Nor did customer retention deteriorate over this period. Conflicts of interest may prompt the incremental POS provider to think twice about integrating with GiveX, but it hasn’t caused existing POS systems to de-integrate….and why would it? Ultimately, the choice of gift/rewards rests with the merchant. A POS vendor may not like that the gift cards/rewards provider they integrate with is now owned by a competitor trying to steal their business, but that doesn’t mean it can just rip and replace the incumbent program without facing strong merchant resistance.

So while I don’t think the $300bn of GiveX merchant revenue is comparable to, say, the $15bn from Focus POS, the addressable monetizable flow may prove similar, if not greater, as a relatively lower win probability is multiplied across substantially larger sales volume. Shift4 appears to have paid an uncharacteristically pricey 20x EBITDA for privileged access to GiveX’s merchants, but GiveX’s EBITDA margin just prior to acquisition was only 11% on 70% gross margins (down from a more “normalized” 22% in 2018), deflated by subcontracting costs, overhead from acquired companies, and other miscellaneous expenses, most of which will surely go away under Shift4’s ownership, bringing the pro-forma multiple closer to (in my estimation) the ~10x-12x that Shift4 has paid for other targets.

The flurry of acquisition activity over the last 6 years has reshaped the end market composition of Shift4 as well as its economics. Restaurants now account for 40% of its end-to-end volumes, down from 80% at the time of its IPO in June ‘20. Another third comes from hotels, the remainder from verticals – like stadiums, non-profits, and specialty retail – that weren’t even on the radar back then. A once forgettable POS provider targeting a single vertical, Shift4 now counts 33% of table service restaurants, 40% of hotels, and 75% of professional sports stadiums in the US as customers. The recently announced acquisition of Global Blue introduces a new end market (luxury retail in Europe) but builds on a familiar strategy. Like GiveX, it pries open a valuable side door to a large number of merchants. But at $2.5bn, the transaction is nearly 30% of Shift4’s current enterprise value, so Global Blue must be evaluated primarily on its standalone merits than on the revenue synergies it delivers.