Misys struggles to show it has changed its ways ahead of IPO

By Eric Auchard

FRANKFURT, Oct (Shenzhen: 000069.SZ - news) 19 (Reuters) - Four years since being taken private after two abortive mergers, British banking software firm Misys is struggling to convince investors it should be valued in line with rival Temenos as it readies to list shares in London.

U.S. buyout firm Vista Equity Partners, which bought Misys for 1.27 billion pounds ($1.6 billion) in 2012, put it up for sale in 2014 but has opted for an initial public offering (IPO) in the coming weeks after failing to find a buyer.

After Swiss rival Temenos walked away from merger talks with Misys in 2012, the British company used its years in private hands to restructure its business, consolidate multiple product lines and expand into areas such as trading and risk management.

The market for financial software is finally growing again after many banks froze spending on outside suppliers in the wake of the 2008 financial crisis and slashed non-core businesses.

Yet according to a source close to the Misys listing, investors are discounting the company to significantly below the value of Temenos, giving it an enterprise value closer to British accounting software firm Sage Group (LSE: SGE.L - news) .

"We were trying to use Temenos as a (comparison), but it ended up (with) Sage as the main comp," the source said. "Investors want Misys to come out at a discount to Sage."

Underwriters have cut the enterprise value for Misys to a range of 4.1 billion to 4.7 billion pounds, 20 percent below the 5 billion to 5.5 billion floated in initial media reports about the listing, according to a second source close to the deal.

The enterprise value to adjusted core earnings ratio for Temenos is 19 and 15 for Sage, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data. Based on its lowered enterprise value and fiscal 2016 earnings, the same ratio for Misys is about 13.

DIVERGING PATHS

Misys and Temenos started from similar places in their core banking businesses but key differences have emerged since the two parted ways in 2012, analysts said.

Christine Barry, a banking analyst with research firm Aite Group, said while Misys leads Temenos in breadth of products and the number of banks it serves, Temenos has had more success in getting business from some of the world's biggest banks, which have historically developed core banking systems in-house.

Also complicating the listing of Misys shares are jitters about the poor stock performance of recent tech IPOs, as well as caution on the part of investors about UK assets after Britain's vote to leave the European Union.

Bankers have pared back the number of shares Misys plans to sell to 20 percent of the capital from at least 25 percent, the first source said, adding that Misys would have an implied market value of 3.15 billion to 3.75 billion pounds.

Misys supplies software to allow bank staff to run core operations for retail and corporate banking, treasury and investment management. It also offers a wide range of follow-on products for bank customers to manage accounts or make payments.

Misys also sees the move by banks to more modern platforms as "a once in a generation shift" that will drive growth.

Market research firm IDC predicts the global financial services technology market - which was worth about $338 billion in 2015 - is set to expand as banks turn to outside software providers to develop the new generation of banking platforms.

Banks spent some $27.9 billion on such platforms from third-party vendors last year and that figure is set to grow to $35.8 billion in 2019, according to IDC data.

CLOSEST RIVAL

Temenos is by far the British company's closest competitor. Geographically, both derive 55 percent of their revenue from Europe, with the remainder roughly divided between the Americas, Asia Pacific, the Middle East and Africa.

According to the company websites, Temenos counts 600 core banking customers while Misys has 330.

Misys has clung to its base of third-tier banks, while selling them follow-on products for lending, payments, digital customer portals. Tier 3 banks typically have less than $100 billion in assets, but often turn to suppliers for all their software needs, unlike bigger banks.

Misys had revenue of 811.4 million euros in its fiscal year to the end of May, up 11.3 percent from 2015, according to a filing announcing its intention to float.

Nearly two-thirds of Misys customers use only one of its financial product lines, it said in the filing, but revenue from cross-selling products jumped to 142 million euros in its latest fiscal year from 69 million euros two years ago.

London-based Misys also boasts higher profit margins. Its adjusted core earnings margin was 41.5 percent for fiscal 2016, compared with Temenos margins of about 37 percent in 2015.

Temenos reported revenue of $559 million for 2015, but grew faster, with sales up 19.2 percent from 2014. Analysts said its margins have been hurt by up-front investments to implement some of its bigger banking deals.

For Temenos, growth picked up after it started selling into the world's biggest banks - institutions with $100 billion to $500 billion, or more, in assets.

"The time that Misys has spent renovating its core banking product is time Temenos spent adapting its core banking platform to meet the needs of Tier 1 and Tier 2 banks," said Bryan, Garnier & Co analyst Gregory Ramirez.

"The Misys playground is mid-sized banks, essentially in emerging markets or in parts of Europe or Asia where banks are smaller," said Ramirez, who rates Temenos stock as neutral.

Other Misys rivals include U.S. players Fidelity National Information Services (NasdaqGM: III - news) (FIS) and Fiserv (NasdaqGS: FISV - news) , software giants SAP (Amsterdam: AP6.AS - news) and Oracle (Hanover: ORC.HA - news) as well as Indian companies Infosys (BSE: INFOT6.BO - news) and Tata Consultancy.

FIS backed out of a merger with Misys in 2011.

($1 = 0.8123 pound) (Additional reporting by Dasha Afanasieva in London; editing by David Clarke)