The recent acquisition of Accelerated Payment Technologies by Global Payments (GPN) got me thinking about something that's been on my mind for a while which is the vastly changing and ever-expanding payment industry and the consolidation that's happening in unison. I'm usually not one to speculate on takeovers because I feel fundamental investing is a far more sound strategy in the long run and if a takeover happens to occur, I consider it a bonus. However, when I find a fundamentally sound company, growing at two times the industry average, trading near book value, and just happens to be in a hot M&A sector, I can't help but try to value the business in a takeover scenario.
From 11/7/11 to 8/15/12 there were 33 mergers and acquisitions in the payment processing industry. For the purpose of this article, I will narrow it down even further to online payment processors which had 11 transactions within roughly the last year. Some of these include:
-Global Payments buys Accelerated Payment Technologies for $413M. Accelerated processes about $8B annually in transaction volume and serves more than 30,000 U.S. businesses. As a result of the transaction, Global Payments does not expect revenue to materially change. Global expects the acquisition to be dilutive to fiscal 2013 GAAP earnings per share, neutral on a cash earnings basis, and accretive to cash earnings in the future. Accelerated is owned by Great Hill Partners LLC.
-Ogone acquires Tunz.com. Ogone is a leading European provider of payment solutions to more than 35,000 e-merchants. Tunz.com is a mobile electronic payment issuer offering a range of mobile payment solutions such as near-field-communication payments, person-to-person payments, and web payments.
-Cielo (CIOXY.PK) acquires Merchant e-Solutions (MES) for $670M. MeS provides traditional, e-commerce and mobile payment processing generating net revenue for the year ending May 31 of $124M, an increase of 24% over the previous period. MeS processes over $14 billion a year in transaction volume for more than 70,000 merchants. Cielo is a leading merchant acquirer and payment processor in Brazil and the biggest payment processor in Latin America.
-FlexiGroup Limited acquires Paymate. FlexiGroup said in a statement Paymate will be used to capitalize on the "significant shift" to online retailing. Paymate has relationships with 3,500 merchants and manages about $20M worth of payments every year.
-Wirecard AG acquires Systems@Work for $60M. Systems@Work is one of the fastest growing electronic payment providers in Asia. The company provides payment processing services for e- and m-commerce to more than 500 customers. Wirecard estimates the acquisition will contribute 4.5M Euros to EBITDA.
-VeriFone (PAY) acquires Point Transaction Systems for $818M. Point is Northern Europe's largest provider of payment and gateway services to nearly 475,000 merchants. VeriFone estimated the deal would boost revenue by $260M and operating profit by $83 million in the first year after it closes.
-Ebay's (EBAY) PayPal acquires Zong for $240M. Zong was one of the pioneers in the mobile payments landscape by developing a compelling new way for consumers to pay for items online. PayPal is a global commerce provider with over 100 million active accounts in 190 markets and 25 currencies around the world.
The one common factor present between all these acquisitions is they primarily involve private companies as the target. Of the transactions that listed financial metrics, the average premium paid on revenue was about 485%. The fact is, there are only a handful of publicly traded payment processors that are small enough to be considered viable takeover targets. So, time to dust off the crystal ball and take a look at a public company that could be in play.
One company I've been following closely for the last few months is LML Payment Systems (LMLP). I was first attracted to this company because of its impressive growth and sizable cash position. LML recently reported 1st quarter results of $5.6M in revenue, $0.02 EPS, and its Transaction Payment Processing ((TPP)) segment grew at 26% and guided for growth of at least 30% the remainder of the year. The company added more than 900 merchants in the first quarter bringing the total customer base to over 14,000. LML has nearly $31M in cash, no debt, and trades at a market cap of about $60M. In fiscal 2012, the company processed over $8B in transaction volume.
LML operates in 3 segments which include Intellectual Property Licensing (IPL), Check Processing (CP), and Transaction Payment Processing ((TPP)). The TPP segment, which operates through Beanstream Internet Commerce, makes up approximately 83% of total recurring revenue.
In order to compare apples to apples, I'll focus strictly on the TPP segment since that is the internet based payment processing which is the primary focus of this article. In fiscal 2012, the TPP segment (Beanstream) reported revenue of about $16.4M. That figure is expected to grow to at least $21.3M by March 31st, 2013. Using the 4.85x revenue premium from previous buyouts, Beanstream could easily be worth over $100M. Throw in cash and you're in the $130M neighborhood, or roughly $4.50 a share. That doesn't even include the other two profitable segments of IPL and CP. Additionally, since Beanstream is growing at more than two times the industry average growth rate of 15%, the premium on revenue could be significantly higher than 4.85x.
Beanstream principally operates in Canada, but also has a presence in the U.S. market. The fact they have been able to grow significantly in a challenging Canadian economy is even more impressive. On Global Payments last conference call they also citied struggles in the Canadian market and indicated they are looking to possibly move into the more lucrative Canadian e-commerce market (incidentally the market Beanstream operates in). On the conference call, Global's President Jeffrey Sloan stated, "On Canada, I think the answer is there is a lot more we can do. So in addition to stuff I mentioned before that I think you just touched on, there are certain markets that were not really well represented in, in Canada. One would be the e-commerce or card-not-present business. So we talked about DCC which we had a release on, and we chatted about that a minute ago. But in certain markets like card-not-present e-commerce in Canada, we have a very small presence. We feel like we're underrepresented there. So we're very pleased in what we've done in the United States in that market in the last number of months. We are certainly taking an intense look, Jason, at becoming bigger in that business, which will help both our growth and I think ultimately our margins. That's an additional item to help the business."
Does this mean Global is looking to make an acquisition in Canada? Not necessarily, but the comments are interesting none the less. In my opinion, LML is a compelling acquisition target because of its leading edge technologies like its mobile payment platform and its impressive growth rate. Even if a buyout is not in the cards, LML is still a fundamentally attractive company growing at nearly 30% and only trading at a slight premium to book value. What ultimately happens to LML is still unknown, but the upside profit is likely to far exceed the downside risk.
*M&A data from mandasoft.com
Disclosure: I am long LMLP.
Additional disclosure: I am not a financial advisor. You should consult your own financial advisor before acting on recommendations to consider its suitability for your investment circumstances.