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Vantiv Deal Renews Interest in Payment Processors

07/24/2017


NYSE:VNTV
NASDAQ:FISV
OTC:WDDYF
NYSE:JPM
NYSE:TSS
NYSE:FDC
NASDAQ:PYPL
NYSE:EVTC
NYSE:WRCDF

Payment processing companies are gaining investor interest as the recent Vantiv-Worldpay dealshines a light on the sector. On July 8th, Vantiv (NYSE:VNTV), the second largest merchant acquirer, offered to buy Worldpay (OTC:WDDYF) for $10 billion, an approximately 20% premium to its pre-deal trading value. Worldpay was a spin out from British bank Royal Bank of Scotland to private-equity firms Bain Capital and Advent International in 2010, and subsequently went public in 2015. Worldpay, known as the largest payment processor in Europe, complements Vantiv’s US merchant processing business and creates a company with strong presence on both sides of the pond. Vantiv and Worldpay are “merchant acquirers,” companies that accept and process card payments between sellers and credit and debit card companies. Worldpay claims to support 400,000 merchants in 126 currencies across 146 countries. JP Morgan Chase, previously the largest merchant acquirer, considered a rival bid in the deal, but in the end bowed out of the bidding for Worldpay. This has lead investors to wonder if it would set it sights on someone else to fulfill its European expansion desires. 

The attraction for Vantiv to buy Worldpay clearly was not only geography, but Worldpay’s revenues contribution from online transactions, which are currently 30% of revenues contrasted with only 10% of revenues for Vantiv. Online transactions continue to cannibalize brick and mortar transactions, and provide higher growth opportunity for processors. The combination of these two companies now makes Vantiv the biggest acquirer surpassing JP Morgan Chase (NYSE:JPM).

This acquisition is the latest in a consolidation trend that was exemplified last year by Global Payments’ acquisition of Heartland for $4.3 billion in cash and shares, TSYS purchase of TransFirst for $2.4 billion and Vantiv’s buy of Moneris USA, the American business of the Canadian payments-processor, for $425 million.

The dealmaking continues as the Danish payment-processing specialist Nets, (who went public in September of 2016), is also said to have received several expressions of interest earlier this month. The interested parties here are rumored to be Apple and PayPal (NASDAQ:PYPL). Other payment processors have moved up in sympathy as investors pose the question—who is next?

Large payment companies are always looking to increase market share or add tuck in acquisitions due to the huge operating leverage of adding volume to a largely fixed cost business. However a bigger picture global strategy is increasingly more important for the biggest players in the field. Not only does a global presence give one stop shopping for international companies, but also gives even more insight into the consumer worldwide. This insight is beginning to attract interest from large advertising and marketing entities such as Google, Amazon and Apple who can parlay purchasing transaction data into future purchases for themselves or the customers they service. Do not be surprised if these players become future acquirers rather than just the usual suspects such as First Data (NYSE:FDC), Fiserv (NASDAQ:FISV), JP Morgan Chase, PayPal, Total System Services (NYSE:TSS), or EVERTEC (NYSE:EVTC). Being able to follow the money rather than just eyeballs is another layer of big data to integrate into marketing plans and spur eCommerce spending. The  European eCommerce Report 2017 said that eCommerce in Europe was $602 billion in 2016, should grow 14% in 2017, and comprises 30% of the global market. This large market share and healthy growth rate makes Europe an important geography.

Not only are their US players attracted to overseas expansion, but also Chinese companies continue to looks for ways to transact international business. Giant Alipay, operated by ANT Financial, a spin off of Alibaba, negotiated a deal with First Data to accept Alipay at 4 million point of sale locations. In April, ANT Financial agreed to buy MoneyGram, a brick and mortar chain allowing the unbanked to send money back home to other countries. It is still awaiting US government approval. While Ant is expanding in Asia through acquisition, it has been less active in Europe. In April WeChat Pay, owned by Tencent, moved into the UK and joined Alipay as an expected payment method in the UK. Both of these payment systems are used primarily by Chinese tourists. 

Wirecard Ups EBITDA Guidance

So who could be the next European payment processor to be acquired? Number two after Worldpay is Germany-based Wirecard (OTC:WRCDF). At an $8.4 million enterprise value its size is in line with the Worldpay transaction leaving the same players able to afford it. It has been growing rapidly and is known for growth through acquisition. For the first quarter of the year, the company grew revenues 31% to €275 million while EBITDA grew 31% to €81 million. Wirecard recently raised its EBITDA guidance from between €382 million and €400 million, to a range of €392 million and €406 million. The stock had blown past the average analyst’s price target of 60 EUR before this announcement and is currently trading above 65 EUR. Investment firms have been raising theirs targets since the announcement. At an $8.4 billion enterprise value the company trades at a valuation of 7.0 times EV to trailing 12-month sales. Using the company’s new EBITDA guidance midpoint of 399 EUR (or $456 million) the company is trading at 18.3 times EBITDA, within its historical 3-year forward EV/EBITDA range of 12-21x.  While not a cheap acquisition for a low multiple bank, its strategic value is harder to quantify. Due to the stickiness of customers, it may in fact be cheaper to buy market share than spend all the effort and time to grow organically making Wirecard a stock to watch.

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