Description

Intro. The spinoff of NCR’s ATM-related business is on track for October 2023.  It is a good time to revisit the situation and consider the pro forma numbers. The “Separation,” through a tax-free spinoff, was announced on September 16, 2022.  The two public companies resulting from the “Separation” will be:

• RemainCo / “CommerceCo” will consist of NCR’s Retail, Hospitality, and Digital Banking business lines; and 

• SpinCo / “ATMCo” will consist of NCR’s Self-Service Banking and Payments & Network business lines. 

Elevator pitch. NCR’s Separation will unlock significant value if completed.  As we show below, at a valuation of 10x EBITDA for CommerceCo and 6x EBITDA for ATMCo, we estimate that NCR’s total value could reach $45 per share, or about +100% upside. (Target multiple sensitivity is also presented below.) Similarly, if capital markets allow for a sale of NCR in lieu of the Separation, we believe that a financial buyer could pay at least $40 per share in a conservative  LBO scenario. Of course, a strategic buyer could likely pay even more.  

Transaction rationales.  Both new companies will benefit from more focused capital allocation and increased operating flexibility. Specifically, CommerceCo will reinvest in higher growth opportunities across its verticals, while ATMCo will offer stable and sustainable cash flows and capital returns. Following the Separation, the two companies should attract distinct shareholder bases, allowing for a more full and fair valuation of NCR’s assets. 

Beyond those rationales is the obvious valuation-uplift potential of a misunderstood public company that has been unable to shake the negativity surrounding its low-growth ATM business. This negativity has certainly been further inflamed in the current regional banking crisis. NCR in its current form just can’t shake the perception that it is an “ATM company.” At around 6.5x 2023 EV/EBITDA pre-split, we believe NCR trades at the valuation of its worst division, despite a substantial portion of its cash flows coming from much better businesses. The Separation (or possibly sale) of NCR is a clear near-term catalyst to remedy this discounted valuation.

Backstory. NCR announced the Separation at the end of a review of strategic alternatives that began early in 2022, which included an evaluation of a potential sale of the Company. Though there were credible reports of large private-equity firms pursuing a potential transaction, financing markets deteriorated throughout the summer, and NCR ultimately concluded that its best path forward would be to pursue the Separation. Still, management has made it clear that it remains open to a sale of the Company should financing markets recover and/or buyers make an acceptable offer prior to the Separation. 

There is a prior VIC writeup on NCR by Saltaire from November 2020 with some active Q&A through September 2022 when the Separation was announced.  This provides good background into the sale process expectations and reasons for its non-completion.  It’s not hard to conclude there is a fair amount of “deal fatigue” built into NCR’s current price.  

NCR Business Descriptions: 

CommerceCo offers integrated hardware, software, and services across the retail and hospitality industries and software applications to the banking industry. CommerceCo is the number one provider of Point-of-Sale (POS) software and Self-Checkout (SCO) hardware solutions, and, as such, the business enjoys a large installed customer base across blue-chip retailers, restaurants, and banks. 

• The Retail vertical manufactures SCO terminals and designs and sells related POS software to help grocery, big box, and convenience stores, as well as gas stations, “run the store.” When combined, NCR’s hardware and software bundle integrates functions including inventory management, fraud and loss prevention, loyalty and consumer engagement, mobile order and pick-up, and checkout and payment. This business benefits from retailers modernizing their stores and adding more SCO terminals, thereby reducing their reliance on labor. Over the medium term, this business should enjoy mid-to-high-single-digit revenue growth and modestly faster EBITDA growth. 

• The Hospitality vertical manufactures POS terminals and designs and sells software applications that help table-service, quick-service, and fast casual restaurants “run-the-restaurant.” When combined, NCR’s hardware and software bundle integrates a variety of functions, including ordering and seating, processing of drive-thru orders, and payments. This business benefits broadly from restaurant companies seeking to modernize their units in order to improve efficiency. Like the Retail vertical, this business should also enjoy mid-to-high-single-digit revenue growth and modestly faster EBITDA growth over the medium term. 

• The Digital Banking vertical helps financial institutions (primarily banks) implement digital-first mobile banking applications. The business designs and sells software that integrates functions such as account opening, account management, account transfer, mobile check deposit, and bill payment. Over the medium term, as banks and consumers increasingly adopt digital-first banking solutions, this business should enjoy low-teens revenue and EBITDA growth. 

ATMCo provides ATM hardware and software for bank-owned ATM networks as well as ATM fleet management services. ATMCo also provides access to one of the world’s largest surcharge-free ATM networks for financial institutions, neobanks, and fintech companies that need to create or extend their retail presence. ATMCo enjoys a large installed customer base across both global financial institutions and retailers. 

• The Self-Service Banking vertical manufactures ATMs, designs and sells software for ATMs, and provides related installation, maintenance, cash management, and delivery services. When bundled, these services comprise NCR’s ATM-as-a-Service offering. This business benefits from banks upgrading their existing ATM fleets to handle more basic business functions and increasingly outsourcing the management of their ATM fleets—which allows those banks to both reduce operating expenses and improve customers’ experience. Over the medium term, as these trends continue, this business should enjoy low-single-digit revenue and EBITDA growth. 

• The Payments & Network vertical manages a global ATM fleet that includes ATMs owned by NCR on which customers place their brand as well as NCR’s global Allpoint retail-based ATM network. In addition, this business provides ATM fleet management solutions to retailers that have ATMs on-site. NCR’s Allpoint network provides a cost-effective way for financial institutions, neobanks, and fintech companies to reach and serve their customers, who in turn use the surcharge-free ATMs for a variety of transactions, including withdrawing cash, depositing checks, paying bills, and adding funds to digital applications. This business generates revenue through interchange, transaction, surcharge, and network fees, and as the number of endpoints and transactions across the network increases, it should enjoy mid-to-high single-digit revenue and EBITDA growth. 

The Numbers:

Today's EV. We believe the current enterprise value of NCR penalizes the company unfairly because of the slow growth and challenges of the well-known ATM business.  The valuation also clearly reflects considerable “deal fatigue” after an aborted 2022 sale process. 

Growth forecast. NCR may also be misunderstood for reporting 2023 revenue growth of only +1%.  This understates NCR’s true organic growth rate significantly because of recent dollar strength (constant currency revenue growth was +4% in the most recent quarter) and the effect of a migration of customers to recurring revenue contracts.  Both factors should become tailwinds ahead and we submit that NCR’s steady-state organic revenue growth rate is 5-6%.  

CommerceCo valuation. We suggest that CommerceCo could command an EBITDA Multiple of 10.0x based on our expectation of sustainable 7-8% revenue growth and low double-digit EBITDA growth.  This is supported by healthy revenue and EBITDA multiples across the financial software and digital banking sectors and specifically growthy multiples among comparable Retail and Hospitality software providers (such as Shopify, Par Technologies and Toast). 

ATMCo valuation. We expect that ATMCo can command an EBITDA multiple of 6.0x based on its modest net leverage, visible recurring revenues and healthy free cash conversion.  This valuation is supported by reference to hardware providers such as Diebold as well as Payment and Network firms such as Jack Henry, Fiserv and Global Payments.  

Sum of the parts. The result is a much-improved combined expected value of NCRs component parts which could reach a 2x return within a year.  

Sensitivities. The following table shows post-Separation target prices at a range of different multiples. 

LBO analysis. To further test and support the NCR value proposition we ran an LBO model at an assumed $40 take out value (all in, about 7.6x 2023 EBITDA).  We assumed 5.0x 2023 EBITDA in available leverage with a 10% cost of debt, 1% transaction fees and SBC converted to a cash comp expense.  Under our conservative assumptions, the 5-year, constant-multiple returns to the equity work out to roughly a 3.0x MOIC and 26% gross IRR.  Financial buyers take note.

Catalyst

A Separation of NCR into two companies - CommerceCo and ATMCo - is a few months away. This could cause a significant positive rerating of the stock.