Source: Global Payments
Headquartered in Georgia, USA, Global Payments (NYSE:GPN) is a leading merchant acquirer. Collectively, the company, Fiserv via First Data (FISV) and FIS via Worldpay (FIS) form the three largest third-party acquirers globally. Competition is fierce and consolidation is rampant with major M&A deals. Yet, Global Payments remains as a solid acquirer with a growing market share.
One of the major drivers of the company is the merger with TSYS which creates a pure-play payments powerhouse with a larger scale. Combined, both companies provide solutions to 3.5 mln merchants and over 1,300 financial institutions across 100 countries. Besides that, the company also expands its presence along the payments value chain as shown below through TSYS’s processing services for issuing banks and consumer solutions businesses with prepaid cards. This provides significant cross-selling opportunities to financial institutions through integrative services.
Source: Arstechnica
The company’s strategy is software-driven focus, omnichannel expansion and exposure to faster growth markets. To drive growth, the company has secured partnerships with big tech and various financial institutions to enhance its core processing capabilities and enhance its distribution channels. Its major partnership is with Google (GOOG) (GOOGL), where the company will provide merchant acquiring solutions to Google and will provide complementary and value-added software solutions and tools from Google to its merchant base. Moreover, the company will migrate its merchant acquiring systems to Google Cloud to enhance performance and drive significant cost efficiencies.
Additionally, it has a partnership with Citi (C), one of the largest global banks, to provide processing services for its latest online and omnichannel payment offering. This will allow the company to expand its international operations by leveraging Citi’s wide global network across 96 countries.
In terms of its revenue breakdown, the company derives revenues from three major segments represented in the chart below.
Source: Global Payments
- Merchant Solutions: Provides payments technology and software solutions to enable merchants globally to accept card and electronic payments. Revenues are generated by services priced as a percentage of transaction value or a specified fee per transaction.
- Issuer Solutions: Provides solutions that enable financial institutions and other financial service providers to manage their card portfolios and offer a seamless experience for cardholders on a single platform. Revenues are derived from long-term processing contracts with financial institutions and other financial services providers.
- Business and Consumer Solutions: Provides general purpose reloadable ("GPR") prepaid debit and payroll cards, demand deposit accounts and other financial service solutions. Segment revenues principally consist of fees collected from cardholders and fees generated by cardholder activity.
Firm Merchant Acquiring Position with TSYS Opportunities
Global Payments has consistently maintained a solid position in terms of market share despite the highly competitive environment due to expanding scale and technology-enabled distribution channels. Third party acquirers such as FIS (Worldpay), Fiserv (First Data) and Global Payments compete against bank affiliated processors such as Chase Merchant Services (JPM), Sberbank (OTCPK:SBRCY) and Bank of America (BAC) which once dominated the acquiring market. The difference between third party acquirers and banks is that third party acquirers are more international and specialized processors that aim to serve a wider market while the banks’ processing services are an extension of its core operations and some banks such as Wells Fargo (WFC) even have a partnership with First Data. Due to their greater scale and wider presence globally, third party processors have outgrown these bank processors. For example, Global Payment’s offices span across 100 countries while JPMorgan and Citi mainly focus on the North American market for traditional acquiring. Only the largest and most dominant banks in their respective regions such as JPMorgan in the US and Sberbank in Russia are able to remain competitive and maintain their market shares while the relatively smaller banks such like Bank of America which has been losing market share due to a scale disadvantage.
Source: NilsonReport, Khaveen Investments
Among the three major acquirers, Global Payments is the smallest in terms of transactions processed. Yet, it is growing the fastest with the highest average transaction growth rate of 16.2% in the past three years compared to 16% for Fiserv and 4% for FIS. The company is achieving high growth by focusing heavily on digital and omnichannel payment solutions and moving away from traditional acquiring. Online and omnichannel payments now account for 25% of revenues with the remainder consisting of traditional acquiring solutions. According to a survey, one third of consumers shop at physical stores most of the time with the remainder shopping online, highlighting the growing importance of omnichannel payments and opportunities for Global Payments.
The company’s commitment towards growing its technology-enabled solutions is further highlighted with the merger with TSYS in 2019 for $21bln. The company is focused on digital and omnichannel payments by integrating TSYS's ProPay platform while building greater scale with both companies combined. TSYS processes over 1.3 bln transactions with over $4 bln in revenues. Additionally, the merger allows the company to expand along the payments value chain with TSYS’ issuer processing business. The company is a leading third-party processor for issuing financial institutions and has a 40% market share. This provides unique cross-selling opportunities with its acquiring solutions by creating complementary relationships with financial institutions along the value chain. This is seen with it signing multi-year agreements with leading card issuers including Wells Fargo Bank, TD Bank Group (TD), Truist Financial Corporation (TFC).
Source: Global Payments
Overall, we believe the merger provides great benefits and opportunities for the company to build greater scale and extend its commitment towards digital and omnichannel payments for its SMB market niche while leveraging its complementary relationships with financial institutions to cross-sell along the value chain enabling more efficient payments. We also note management’s annual run-rate synergies of at least $150 mln in revenue and $400 mln in expenses.
Partnership with Google
Recently, Global Payments had announced a strategic multi-year partnership with Google to provide merchant acquiring services to Google and migrate its acquiring technology to Google Cloud. This is significant because Google handles more than 3 bln in transactions annually. Also, Global Payments builds on its payments ecosystem to compete against the likes of Square by integrating Google’s APIs like Google Workspace and Google Ads with its payment technology to enhance its value proposition for merchants.
Global Payments will become a worldwide merchant acquiring provider to Google. It was selected as the preferred acquirer using the company’s Unified Commerce Platform to streamline its payment acceptance needs globally. In the Q4 briefing, the company highlighted Google’s 3 bln annual transactions across the Google platform such as the Google Play store. According to SensorTower, an average Google user spends $30, this translates to an opportunity of roughly $90bln in transaction volumes which is roughly 10% of Global Payment’s transaction volumes processed. We believe Global Payments can execute the integration smoothly as it is a global leader accepting over 140 payment methods in more than 100 countries. Its strong focus on its omnichannel payment solution makes it more attractive against other Google partners such as First Data, Worldpay and PayPal (PYPL). This provides a long-term growth driver for the company as it slowly transitions to be the main payment provider. In the case of Adyen (OTCPK:ADYEY), its integration with eBay (EBAY) had an expected time frame of around 3 years.
Another key point of the Google partnership is that Global Payments’ merchant customers will have access to a range of software-as-a-service offerings, including data and analytics, omnichannel ordering, payments, collaboration suite, email marketing, online presence and reputation management, loyalty, gift card, point-of-sale, capital access and payroll solutions. For example, enabling merchants to make use of Google’s public APIs (Google Workspace, Google My Business, Google Ads) integrated with its payment solutions to manage and grow their business more effectively.
Besides that, Global Payments will migrate its merchant acquiring technology to Google Cloud. Moving to a cloud-based system provides significant benefits in terms of distribution speeds and security. Google Cloud is a leading infrastructure, platform and industry solutions provider in 150 countries. Global Payments will be able to maintain the highest level of scalability, reliability, and security, while increasing its ability to seamlessly deploy transaction services on-demand anywhere in the world by moving to the cloud. This is crucial for the company as it expands internationally.
Source: Global Payments
Leveraging International Expansion Opportunities with Citi
Besides the Google Cloud migration, its global expansion strategy is also highlighted with its efforts to expand its global merchant base and leveraging its partnership with Citi, one of the largest global banks, to work together to deliver an omnichannel payment solution to merchants around the world. Despite its global network, the company’s revenues are still heavily concentrated in the US which accounts for almost 80% of revenues and signifies room for international expansion.
Source: Global Payments
Global Payments will also be working with Citi to provide payment processing for its latest Spring payment offering as part of its core focus of creating an end-to-end offering of transaction banking services. Citi is one the largest global banks with 13,000 institutional clients across 96 countries and its strong commitment towards digitalization can benefit Global Payments tremendously by allowing it to tap its wide network to expand internationally. It is unsurprising Citi chose Global Payments due to its solid track record and wide global network access through the Global Payment’s Unified Commerce Platform, which enables online and omnichannel payments and has grown rapidly to account for a quarter of its revenues.
According to the Nilson Report, Citi processed over 7.1 bln transactions valued at around $215 bln. Citi’s new Spring payment offering highlights its shift towards online and omnichannel payments and has tapped Global Payments as a key partner to process the transactions on its behalf. Competition is heating up, but Citi has a strong commitment towards its digitalization strategy and has the highest tech spending as a percentage of revenues among the bulge bracket banks at 10% of net revenues.
Besides that, the company is consistently expanding its global footprint and widening its network by extending partnerships with financial institutions, for example the Scotiabank in Central America, Bank of Ireland (OTCPK:BKRIF) and Banco Invex in Mexico. We believe this will advance its international expansion strategy and lead to larger revenue contributions outside North America.
Increasing Competitive Risks with Industry Consolidation
Merchant acquiring is becoming increasingly competitive and faces pressures from fintech companies such as Square (SQ), PayPal and Adyen. As payment technological trends continue to evolve, the incumbent players including Global Payments risk being outcompeted from fintech companies by offering more attractive and comprehensive omnichannel payment solutions. Consolidation is also becoming increasingly prevalent in the payments industry as companies expand scale inorganically. There has been consolidation among the largest merchant acquirers including Fiserv-First Data and FIS-Worldpay. Global Payment also merged with TSYS to become a larger acquirer with greater scale and maintain its competitiveness.
Source: FT
Even so, the company still has a smaller scale than FIS and Fiserv which could be a major disadvantage to the company in terms of operational efficiencies and costs. However, this is slightly mitigated as Global Payments is able to charge a higher fee of 0.5% versus 0.25% for FIS and Fiserv because the company focuses on a niche market with mid-size merchants with $200,000 to $650,000 in revenues compared to FIS and Fiserv that cater to large multinationals. Though, the downside is that its merchants may replace the company with larger acquirers who can meet their needs better as they grow larger. Also, it was reported that a potential merger between the company with FIS has broken down due to antitrust concerns. We believe it could have created a company with greater competitiveness and dominance over the industry.
Valuation
The company has an average revenue growth rate of 23.5% in the past 5 years which includes incremental revenues from the TSYS merger. In terms of profitability, the company has high margins with an average gross and net margins of 56.1% and 9.5% in the past 5 years.
Source: Global Payments, Khaveen Investments
More importantly, the company has grown its free cash flows and achieved positive margins with an average FCF margin of 6.56% in the past 5 years. In 2017 and 2018, the FCF margins were negative due to the acquisitions of ACTIVE Network and AdvancedMD payment software providers for $1.2 bln and $700 mln respectively.
Source: Global Payments, Khaveen Investments
As the company has relatively stable FCF generation abilities which we believe can be sustained with its scalable nature of the business, we applied a DCF analysis to value the company. Our model is based on the merchant acquiring industry consisting of Fiserv and FIS. These companies were selected as they are pure play merchant acquiring companies that are highly comparable to Global Payments. The industry EV/EBITDA average is 23.52x.
Company | EV/EBITDA |
Global Payments | 23.7 |
Fiserv | 21.5 |
FIS | 25.37 |
Average | 23.52 |
Source: Seeking Alpha
We derived the revenue projections based on its segments. Its merchant solutions segment is based on industry growth forecast of 10.4% but is slightly higher as we anticipate the company to gain market share. The issuer segment is based on the payment processing industry growth estimate of 10.4% which is reasonable given TSYS’s dominance over this market. Finally, the consumer segment is based on the prepaid card industry growth forecast of 13% driven by the rising popularity of prepaid card usage.
Revenue Forecasts ($ bln) | 2020 | 2021 | 2022F | 2023F |
Merchant Solutions | 4.68 | 5.28 | 5.83 | 6.44 |
Merchant Solutions Growth % | 12.9% | 10.4% | 10.4% | |
Issuer Solutions | 1.98 | 2.18 | 2.40 | 2.64 |
Issuer Solutions Growth % | 10.4% | 10.4% | 10.4% | |
Business and Consumer Solutions | 0.83 | 0.94 | 1.06 | 1.20 |
Business and Consumer Solutions Growth % | 13% | 13% | 13% | |
Total Revenues | 7.49 | 8.40 | 9.29 | 10.27 |
Total Revenues Growth | 12.1% | 10.6% | 10.6% |
Source: GlobalPayments, SDKI, CardFlash
Based on a discount rate of 11.7% (company’s WACC), our model shows that the company is perfectly priced despite its healthy outlook with an upside of 10.95%.
Source: Khaveen Investments
Verdict
Third-party acquirers are faced with rising competition and consolidation. However, Global Payments stands out as one of the top 3 largest third-party acquirers besides Fiserv and FIS. Its commitment towards digitalization with online and omnichannel payments which has grown to a quarter of revenues as well as its merger with TSYS allowed it to maintain a decent market position with a growing market share. Going forward, its pivot towards digital payments provides opportunities for it to benefit from the shift towards cashless payments and the merger with TSYS enables it to build greater scale and expand along the value chain by leveraging complementary relationships with financial institutions.
Also, the company has secured partnerships with Google to migrate its platform to the cloud and provide acquiring services to Google which will benefit its transaction volume growth. The partnership also enhances its payments technology with value-added services and tools from Google to meet the needs of merchants to grow their businesses. Moreover, the partnership with Citi is highly significant as it allows the company to leverage the bank’s wide global footprint to provide digital and omnichannel processing services to merchants globally. Overall, we rate the company as a Buy with a target price of $235.74.
