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Morningstar | Global Payments to Merge With Total System Services

Continuing the wave of M&A we’ve seen recently in the acquiring space, Global Payments has agreed to merge with Total System Services. The all-stock deal values Total System Services at about $120 per share, and its shareholders will own 48% of the combined company’s shares. Global Payments’ CEO Jeff Sloan will remain as CEO, and Total System Services’ CEO and Chairman Troy Woods will serve as chairman. While we debate the value of combining acquiring and issuer services, Total System Services also has material acquiring operations. This will add scale to the company, a factor we view as a primary driver of moats in the space. Further, including the expected cost synergies, the deal looks reasonably valued, as we estimate the EV/adjusted EBITDA at about 15 times. We remain comfortable with our $131 fair value estimate and narrow moat rating for Global Payments, which we will maintain, although we might make a modest adjustment after fully reviewing the details of the merger.

Management expects to realize at least $300 million in cost synergies and $100 million in revenue synergies within three years. These targets look realistic to us. Total System Services' revenue currently breaks down as about 45% issuer services, 35% acquiring, and 20% prepaid consumer cards. We see the most compelling combination on the acquiring side, as we view scale as a critical factor in this industry, and size will create more resources to adjust to shifts in the industry, aiding efforts to integrate with business software and expand omnichannel capabilities. Total System Services' issuer business could also see some modest benefits from Global Payments’ international presence and open up some markets it doesn’t currently serve. We think Total System Services' prepaid card business could ultimately be a candidate for divestiture, as we don’t see much of a strategic link with the rest of the combined company, and this segment is Total System Services' lowest margin operation.

On the negative side, the acquiring business is a relatively small part of Total System Services' overall business, and the strategic connection to the rest of the business could be viewed as somewhat weak. Further, Total System Services' issuer business is lower growth, compared with the acquiring industry.

Following the merger, the company’s debt/EBITDA will be about 2.5 times, which would seem to allow room for further M&A down the road. However, the company wants to maintain an investment-grade rating and will now pay a modest dividend. This suggests to us that management sees no need for more transformative M&A and will be content with smaller bolt-on deals, likely continuing to focus on adding software capabilities in specific industry verticals to support the acquiring business.