Summary:
- Global Payments (GPN.US) to merge with Total System Services (TSS.US)
- Transaction will create payments company with strong international presence
- Combined company expected to be awarded with investment grade rating
- Management plans to keep the financial leverage low
- Share prices of TSYS and Global Payments set fresh ATHs on merger announcement
Beginning of 2019 will be remembered across the US payment processing industry due to major mergers and acquisitions. First Data was bought by Fiserv for $22 billion in January while Fidelity Investment’s $34 billion takeover of Worldpay was announced in mid-March. However, recently another major merger within the industry was announced - tie-up of Global Payments and TSYS (Total System Services).
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Both Global Payments and TSYS managed to increase revenue over the past 5 years and to improve net profit margins. Note that the major jump in TSYS revenue in mid-2016 was a result of acquiring TransFirst. Source: Bloomberg, XTB Research
After weeks of speculation markets were offered a confirmation that another mega-merger in the US payment processing industry is underway. Global Payments announced that it will merge with TSYS in an all-stock deal. The transaction is valued at $21.5 billion and is more or less the merger of equals as TSYS shareholders will hold 48% stake in the combined entity while current shareholders of Global Payments will hold the remaining 52%. Each of the two companies will be represented by 6 members on the combined entity’s Board. Jeff Sloan, the current CEO of Global Payments, will serve as the CEO of the combined company while Troy Woods, the current President of TSYS, will serve as the Chairman.
Total System Services paid out just a small portion of earnings or free cash flow as dividend hinting at dividend safety. On the other hand, Global Payments often saw negative free cash flow due to higher investments. Dividend of Global Payments in each presented quarter was $0.01. Source: Bloomberg, XTB Research
Both stocks are labelled payment companies but their businesses are somewhat different. Global Payments specializes primarily in providing payment technologies and processing services while TSYS is also a credit card issuer apart from being payments processor. Having said that, the deal is more of a vertical merger than a horizontal one and thus may also provide cost synergies beyond those resulting from economies of scale. The two companies serve a variety of clients but small and medium businesses are the core of their operations. Combined entity will serve around 3.5 million of such enterprises and over 1300 financial institutions in over 100 countries. Moreover, the company will process over 50 billion transactions annually. The combined company will retain Global Payments name while TSYS will operate as a subsidiary responsible for issuer solutions.
Despite some fluctuations over the period, TSYS’s margins were more or less unchanged at the end of Q1 2019 against Q1 2015. On the other hand, Global Payments saw significant improvement in both EBITDA and EBIT margins over the same period. Source: Bloomberg, XTB Research
As we have already mentioned that transaction will be financed with stock. Shareholders of TSYS will receive 0.8101 shares of Global Payments for each share of TSYS they own. The exchange ratio was determined as to offer approximately 20% premium over the TSYS closing price on 23 May 2019. While equity financing is usually more expensive than debt financing it also has some advantages. The main one is the fact that the acquiring company (Global Payments in this case) will not assume additional debt and therefore will not increase its financial risk. In the merger announcement the two companies said that they expect the combined entity to have 2.5x leverage following the close of a deal. Management aims to maintain this leverage in order to retain the investment grade rating that is expected to be awarded immediately after the merger.
TSYS (TSS.US) share price has been slowly moving higher throughout the first half of 2019 and managed to set a new ATH in mid-April. Price jumped significantly higher after the merger was announced as investors adjusted market price to the merger price. Lack of any bigger corrective move shows that the market does not assume that the tie-up will not succeed. Source: xStation5
Just like many other established US companies, Global Payments and TSYS are dividend paying companies. However, there are some differences when it comes to profit sharing policies. Global Payments share only a small portion of profits with shareholders as its payout ratio averaged at less than 2% in the past five years. On the other hand, TSYS was more generous with an average payout ratio of 20% in the past 5 years. Dividend yield for Global Payments for 2018 stood at just 0.04% while dividend yield for TSS reached 0.64%. Both companies are devoted to distribute only those profits to shareholders that they are not able to use efficiently themselves therefore low dividend yield should not be viewed as a worrying factor. Nevertheless, in the merger announcement the two companies said that they will aim to preserve dividend yield of TSS rather than Global Payments.
Global Payments (GPN.US) also had a stellar beginning of the year. The stock is trading almost 60% higher against December’s low and just like TSYS has set a fresh ATH once the merger was announced. Part of the gain was erased but the stock keeps trading above pre-announcement levels. Source: xStation5
