Shares in EML Payments ended a dramatic day down 45.6% (or $2.35) at $2.80 after they started the session in a trading halt to allow a statement to be released that confirmed it had discovered a business it bought in early 2020, now faces significant regulatory problems in the EU post-Brexit.
The company’s shares more than halved in value (down 52%) in early trading after the halt was lifted, plunging to $2.47.
Ireland’s Central Bank sent EML a letter late last week raising concerns about EML’s Prepaid Financial Services (PFS), which is purchased in March 2020 for $252.3 million, down from an earlier price of $455 million (that in itself raised eyebrows among some investors)
The Central Bank of Ireland is worried about PFS’ anti-money laundering and counter-terrorism financing risks and governance and “is minded to issue directions” to the Irish subsidiary.
Before Brexit, PFS was regulated by British authorities (the UK was part of the EU). However, on December 19, 2020 all of the non-UK programs were transferred to Ireland and fell under the control of the Irish central (and the European Central Bank and other key financial regulators). This allowed PFS to be offered throughout the EU.
Action by the Irish central bank could very well restrict that.
“The directions, if made, could materially impact the European operations of the Prepaid Financial Services business, including potentially restricting activities under the Irish authorisation,″ EML warned shareholders in the statement to the ASX on Wednesday morning
Around 27% of the company’s global revenue in the March quarter came from operations that now fall under Irish regulation, so the situation is very serious financially to EML.
The Irish problems do not affect EML’s Australian or North American operations, or the PFS UK subsidiary, or EML’s other Irish operations, EML Money.
EML has until May 27 to respond to the Irish central bank about the concerns about PFS’ business model.
EML said it could not yet estimate what impact the regulatory intervention will have on full-year results.
But it reiterated expectations for full-year revenue of between $180 million and $190 million leading to full-year profit of between $30 million and $33.5 million.
Currently analysts see profits of about $22.7 million.
And there is a potential second problem for EML from the PFS problems. It recently entered into a binding agreement to acquire Sentenial Limited and its open banking product, Nuapay. This is for an upfront enterprise value of 70 million euros ($A108.6 million) and an earn-out component of up to 40 million euros ($A62.1 million).
Sentenial is a leading European Open Banking and Account-to- Account (A2A) payments provider, utilising a cloud-native, API-first, full stack enterprise grade payment platform.
This acquisition remains subject to regulatory approval. Investors are now asking if the Irish Bank’s concerns about PFS means regulatory trouble for the Sentenial purchase.
If so, will EML be left high and dry and having to pay for a company that it can’t operate?
