[Sniper]

Acquisition of Netbanx (copmmentary by Evolution securities)

Neteller has acquired Netbanx, a UK Payment Service Provider (PSP), for £12.4m. The acquisition represents a significant step into the PSP market and helps to diversify away from the core US-focused gambling business.

Neteller has acquired Netbanx, a leading UK Payment Service Provider (PSP) for £12.36m in cash. Netbanx has relationships with all the major UK acquiring banks and processes approximately £10m of credit card payments per month. Netbanx has >1500 merchants including Royal & Sun Alliance, nPower and Companies House.

Payment Service Provider’s facilitate online debit and credit card transactions. Neteller is not a PSP but connects to PSP’s in order to facilitate its money transfers
to and from its e-wallet. Therefore, there should be some cost savings from vertical integration. However, Netbanx is a UK operator whilst most of NLR’s transactions are derived from the US, therefore the cost savings for the core business is likely to be relatively small. The principal benefits derive from diversification, both geographical and product based as NLR strives to build a strong position in the fast growing global electronic payments industry.

Netbanx reported Sales of £27.7m and PBT of £1.1m for the 18 months to June 2005. The closest listed comparator to this business is Datacash (DATA.L) not covered, which is a leading PSP with a focus on the UK gambling industry. DATA is growing profits rapidly benefiting from high operational gearing and trades on a FY05 PER of 20.8x and a FY06 PER of 18.7x.

The company expects the acquisition to be earnings enhancing in its first full year, which seems reasonable based on the information provided. We will report back
with our revised estimates, but the bottom line is that this is a sensible but not transformational acquisition. We applaud management’s drive to diversify the business away from US-focused gambling, which should theoretically yield a higher rating (as the impact of regulatory change would be reduced). However, we would need to see a lot more deals and initiatives of this kind before the USgambling related business ceases to become the overwhelming contributor to group earnings.