The financial-technology merger frenzy continued on Tuesday, as Global Payments Inc. officially announced a $21.5 billion all-stock deal for Total System Services Inc.
The deal is the third such combination to be announced in the payments industry this year that is focused on creating a two-party platform that can serve both financial institutions and merchants. Fiserv Inc. announced plans to acquire First Data Corp. in January, while Fidelity National Information Services Inc. said it planned to combine with Worldpay Inc. in March.
Global Payments GPN, -2.25% and Total System Services (TSYS) TSS, +5.54% are billing their deal as a “merger of equals” through which Global Payments shareholders will own 52% of the new company and TSYS shareholders will own the remaining 48%. TSYS shares are up 5.6% in Tuesday’s session after climbing almost 14% on Friday, when deal rumors first emerged. Global Payments’ stock is down 2.2% in Tuesday trading, giving back some of its gains from Friday.
“This accelerates the strategy we’ve had for the last couple of years to grow in the most attractive markets with a leading international payments business, a leading e-commerce and omnichannel business, and exposure to the fastest-growth geographies,” Global Payments Chief Executive Jeff Sloan told MarketWatch.
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Sloan said that the deal is consistent with the company’s recent attempts to create a more software-driven business, a strategy that has led to higher growth and higher margins. He said that the combined company will have double the partner-software revenue that Global Payments had on its own, as well as an expected investment-grade credit rating, which could prompt more software deals.
“Given the capital profile and the free-cash capacity of the business, expect to see more vertical-market software plays by us,” he said.
Though TSYS has a slower growth profile than Global Payments, Chief Financial Officer Cameron Bready expects that a deal won’t hurt Global Payments’ ability to reach its medium-term targets for high single-digit to low double-digit annual revenue growth and adjusted earnings growth of 16% to 18%. The company might be “at the lower end of that range” for revenue growth out of the gate, he said, but Global Payments expects faster growth once revenue synergies kick in.
The company projects at least $300 million of annual run-rate cost synergies and predicts that the deal will be earnings accretive by the mid-single digits in 2020.
Wedbush analyst Moshe Katri sees the deal as intriguing given looming Payment Services Directive II regulations in Europe, which will require that banks provide open-banking applications for third parties in the banking industry and elsewhere. “Merchant processors have many open [application programming interfaces], technologies that financial processors can use to provide to their banking clients,” he told MarketWatch.
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Katri expects that the combined company will eventually move to a single merchant-processing platform and see synergies from cross selling APIs.
Barclays analyst Ramsey El-Assal wrote that he thinks the “mega-merger” makes sense for Global Payments and TSYS as it “creates a scaled acquirer with a stronger combined position in SMB-focused integrated payments and e-commerce/omni-channel solutions,” he said, referring to small- and medium-sized businesses.
Sloan said that serving smaller merchants is “an attractive place to be positioned.”
Global Payments shares have gained 46% in 2019 to date, while TSYS has gained 47%. The S&P 500 SPX, +0.02% has gained 13% and the Dow Jones Industrial Average DJIA, +0.03% has gained 10%.
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