Brazil's Tech Deal of the Year: Totvs in Exclusive Talks to Acquire StoneCo's Linx

The Brazilian tech sector is abuzz with news of Totvs SA, a leading enterprise software firm, entering exclusive negotiations to acquire Linx, the management software division of payment giant StoneCo (NASDAQ: STNE). The deal, expected to finalize by early 2025, marks a pivotal strategic shift for StoneCo and a major opportunity for Totvs to expand its footprint in specialized enterprise solutions. Here’s what investors need to know.

The Deal: Valuation and Timeline

StoneCo is targeting a R$4.5 billion (USD $850 million) valuation for Linx, based on 15x its EBITDA. This figure aligns with StoneCo’s acquisition cost in 2020 but faces uncertainty due to current offers reportedly falling short of that price. Binding bids from Totvs and other interested parties—such as Canada’s Constellation Software and U.S.-based Roper Technologies—are expected by early 2025.

Why StoneCo is Selling

StoneCo’s CEO, Pedro Zinner, has long emphasized the need to refocus on its core payment services and digital banking platforms, which offer faster scalability than Linx’s sector-specific software. Linx’s software, while critical for industries like retail and pharmacies, requires lengthy integration periods (up to three months) and customization—a drain on resources better spent on high-margin payment solutions. This strategic pivot aligns with StoneCo’s Q2 2024 results, which showed an 8.5% revenue increase and a 42% jump in retail deposits, underscoring its core strengths.

Totvs: A Familiar Contender

This isn’t Totvs’s first rodeo. It lost a 2020 bidding war for Linx to StoneCo but now has a clearer path to victory. Totvs’s $2.4 billion market cap and expertise in ERP systems make it a logical buyer. The exclusivity agreement, while not detailing terms, likely grants Totvs 60–90 days to finalize negotiations without competition. Success here would boost Totvs’s presence in Brazil’s R$20 billion enterprise software market, where it already holds a leading position.

The Bidding Landscape

Six parties are vying for Linx, including private equity firm Advent and Mercado Libre, signaling the asset’s strategic value. However, Totvs’s sector-specific knowledge and geographic alignment make it the frontrunner.

Market Implications

• StoneCo: A successful sale would free up capital for share buybacks or debt reduction. Analysts project EPS accretion of 5–10% in 2025 if proceeds are redeployed strategically. However, a below-target sale could pressure its stock, currently trading at $9.75, down 77% from 2020 highs.
• Totvs: Acquiring Linx could increase its addressable market by 30%, but integration risks exist. Totvs’s shares have risen 12% YTD, reflecting optimism about the deal.

Risks and Challenges

• Valuation Gap: StoneCo’s R$4.5 billion target may clash with buyers’ willingness to pay in a slower-growth environment.
• Regulatory Hurdles: Brazil’s CADE antitrust authority could scrutinize the deal, given Totvs’s existing market share.
• StoneCo’s Post-Sale Strategy: Executing on its core fintech vision, amid rising interest rates and competition from PIX, Brazil’s central bank digital payments system, will be critical.

Conclusion: A Win-Win, If Executed Right

The Totvs-Linx deal has the potential to reshape Brazil’s tech landscape. For StoneCo, it’s a chance to simplify its portfolio and focus on high-growth areas. For Totvs, it’s a step toward dominating enterprise software in key sectors.

Crucial data points to watch:- Final Sale Price: Will it meet StoneCo’s 15x EBITDA target?- StoneCo’s Q3 2024 Results: A 30% YoY increase in MSMB clients in Q2 bodes well, but sustained momentum is key.- Totvs’s Integration Plans: How quickly can it leverage Linx’s client base without disrupting its existing operations?

With Brazil’s tech sector poised for growth—digital payments in Brazil grew 18% YoY in 2023—this deal could be the catalyst investors are waiting for. Yet, execution remains everything.