A report released by Spruce Point Capital Management questioned the backgrounds and connections of a number of current and former Nuvei executives, and raised concerns about the company’s accounting for recent acquisitions.
The 119-page report, released just before the markets opened on Wednesday, had an immediate impact: Nuvei shares fell by 55 per cent on the Toronto Stock Exchange from Tuesday’s close, wiping out nearly $10-billion in market value, before recovering and closing at $73.12.
In a statement Wednesday evening, Nuvei said it “believes the recent report issued by a short seller is intentionally misleading and draws inaccurate conclusions, innuendo and character attacks on key executives, among numerous other issues. The personal attacks on Nuvei executives made by the short seller appear to have been made to distract from the Company’s achievements and progress. The short seller admits that it stands to profit significantly from Nuvei’s stock price decline, at the expense of Nuvei’s shareholders, customers and employees.”
Short-selling shares is a bet that shares will drop, with an investor borrowing shares, selling them and repaying the loan by returning new shares, hopefully bought at a lower price. Contacted by e-mail, Spruce Point chief executive officer Ben Axler would not say how large the firm’s short position is, citing his company’s policy and U.S. securities laws that restrict investment funds’ public statements.
Spruce Point is fresh off another successful short campaign against Lightspeed Commerce Inc. in September. Lightspeed, another Canadian company that operates in the payment technology sector, fell 12 per cent on the day of Spruce Point’s report but tumbled even further five weeks later when it issued conservative sales and profit guidance for the coming year. It is now trading about 50 per cent below its level prior to the Spruce Point report on Sept. 29.
Spruce Point’s successful bet against Lightspeed and Nuvei mark a turnaround for Spruce Point after unsuccessful campaigns against Dollarama Inc., Canadian Tire Ltd. and GFL Environmental Inc. over the preceding three years.
Nuvei was attacked at a time when investors have become gun-shy about high-multiple, unprofitable growth stocks, particularly in the tech space. Some companies have failed to sustain the torrid pace of growth they experienced in the first year of the pandemic as people flocked to online digital tools to communicate and shop. Over the past three months, information technology stocks in the S&P/TSX Composite Index have fallen 4.66 per cent, versus a 1.66-per-cent gain for the overall index, according to Bloomberg.
Nuvei’s US$805-million initial public offering in September, 2020, was the largest technology IPO in Toronto Stock Exchange history at the time. It was one of the first of a string of Canadian tech IPOs in what has proven to be an unprecedented run of new issues from the sector.
While some of those IPOs were uneven, Nuvei had been a star: Its shares rose more than 400 per cent over the next year to peak at $180 on Sept. 17, 2021 – giving it a market capitalization of more than $25-billion. But even before the Spruce Point report was published, the shares were already off by a third this fall, closing at $122.73 on Tuesday.
Spruce Point’s report highlighted a number of omissions on executive biographies. They include two executives who, Spruce Point said, previously worked at a payments company that agreed to forfeit about $19.2-million in criminal proceeds derived from processing payments for illegal internet gambling websites, as part of a non-prosecution agreement with the U.S. government. Another Nuvei executive, Spruce Point said, has been a defendant in civil suits, including one from the West Virginia Attorney-General, alleging improper payday-loan practices.
Spruce Point also said Nuvei is “not transparent about what is driving its revenue growth.” The report said Nuvei is not disclosing new merchant additions, or the churn in merchants each quarter; the revenue split between small or medium-sized businesses and large enterprises; revenue by sales method or industry vertical; or sales from transactions versus subscription fees.
The short-seller also questioned how Nuvei’s financial statements suggest a rapid improvement in profitability at two recent acquisitions – SafeCharge Ltd. and Smart2pay BV – when Nuvei has reported little acquisition or restructuring costs and LinkedIn profiles and other public documents suggest there were no meaningful layoffs at either company, Spruce Point said.
In its statement, Nuvei said it “urges investors to not make decisions based on the short seller report and to review public filings for material information that pertains to its business.” The company reaffirmed its financial outlook issued one month ago, which included a forecast of US$717-million to US$723-million in revenue and adjusted operating earnings of US$312-million to US$316-million this year. Nuvei also set medium-term revenue and transaction volume growth targets of 30 per cent annually and a long-term adjusted operating profit margin target of 50 per cent of revenues.
Heading into Wednesday’s decline, Nuvei traded at 22 times the past 12 months’ sales, according to S&P Global Market Intelligence, and 61 times its trailing EBITDA, or earnings before interest, taxes, depreciation and amortization. At its peak, those multiples were 36 and 99, according to S&P.
“Nuvei commands a premium valuation to financial technology peers ... but we believe it should trade at a discount to incorporate our documented concerns,” Spruce Point wrote, saying it saw “40 per cent to 60 per cent downside risk.” That downside risk was reached in Wednesday’s trading.
Analyst Richard Tse from National Bank Financial, in a note on Wednesday, said he was “still reviewing” the Spruce Point report, owing to its length. “For now, we think the short report opportunistically plays on a name that operates in some non-traditional segments like gaming which come with the appearance of greater risk,” he wrote. “That said, we’ve seen nothing thus far that would change our investment thesis on the name.”
Mr. Tse said the detailing of Nuvei’s ties to people with “controversial histories” will have a “headline impact, and that such overhang won’t fade quickly. What we can say is that based on our analysis to date, the reported results show a management team that’s executed on its strategy laid out in its IPO.”
Nuvei’s IPO made chief executive officer and founder Philip Fayer a billionaire and represented a huge victory for early investors private-equity firm Novacap and Caisse de dépôt et placement du Québec. Mr. Fayer and the two institutional investors have sold 17.5 million shares through the IPO and two subsequent stock offerings, including nearly 5.4 million shares by Mr. Fayer.
Nuvei’s most recent disclosures show the Caisse holding 17.65 million shares, or 12.35 per cent of the company. Caisse spokeswoman Kate Monfette said “CDPQ takes a long-term approach with its investments – and therefore does not comment on the day-to-day fluctuations of publicly traded companies.”
The pension giant highlighted Nuvei and Lightspeed as important Quebec investments in its 2020 annual report.
“We supported businesses with a $4-billion envelope and helped to position them for the recovery,” Caisse CEO Charles Emond wrote. “There have been many great stories: Nuvei and Lightspeed’s successes on the stock market. ... Québec’s economic fabric is undergoing a transformation, and we are proud to contribute to the emergence of champions, both locally and around the world.”
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