The Payment Industry’s Third Mega-Merger Of The Year

• Payment technology companies Global Payments and Total System Services, two of our Mobile Payment certificate positions, have agreed this morning on a stock merger of equals. Global Payments will have 52% of the combined entity and its CEO, Jeffrey Sloan, will run the new company. The transaction will create a powerhouse that provides payment technology and software to more than 3.5 million small to midsize merchants and more than 1,300 financial institutions worldwide. The all-stock deal gives to Total System Services a 20% premium to its closing price on May 23, before Bloomberg first reported deal discussions with Global Payments. The combined entity is expected to generate about $8.6 billion annually in adjusted net revenue plus network fees, with $3.5 billion in earnings before interest, taxes, depreciation and amortization and $2.5 billion in free cash flow.
• This is the payment industry’s third mega-merger of the year. Established financial companies are trying to compete with new technology players, like Square and PayPal, which offer technology driven services. Building a successful company isn’t just about growth, but it’s also about scale. Scale is about adding revenue at a rapid rate while adding resources at an incremental rate. Resources that are very important to ride effectively the global payments growth that we are seeing. This transaction will give to the new entity vertical market exposure and payment software capabilities. It is imperative in this sector to develop and continually refresh sound payments strategies to remain competitive in a market continually reshaped by new technologies, new competitors and more and more sophisticated customer demand. For these reasons, we totally see the rationale of the deal, even if we are not very excited about the synergies announced. $300m of cost synergies and $100m of revenues synergies are relatively well below the synergies announced for the other two mega-deals. The two companies have less overlaps versus Fiserv and First Data Corporation or Fidelity National Information Services and Worldpay and have some cultural clashes as well. Every mergers have peculiarities and complications, but between the three, probably this one is the riskier. We are evaluating what to do with our positions.
• Speaking of payments industry in general, someone could see these mega transactions as an indication of maturity for the sector and the end of the buzz. We think this is the opposite. Payment industry was born with the digital era and e-commerce at the end of 90’s. Now the full retail world is on the way of digitalization, it is like a full reboot, and there is still more to come. We are seeing a huge activity on the private market that bodes well for the future. Small technological companies are entering the market with exciting new products, digitalization of transactions is in full swing and we are continuously looking for new investment opportunities.