Fidelity National Information Systems
DreamstimeTwo of the biggest players in payment processing have reportedly called off merger talks, but analysts are reiterating bullish calls on the stocks, saying the discussions are a good sign for valuations and further consolidation.
Global Payments (ticker: GPN) and Fidelity National Information Services (FIS), known as FIS, were close to a merger worth around $70 billion, The Wall Street Journal reported Sunday, citing people familiar with the matter. The companies called off the talks in the last few days, the Journal reported, and there isn’t much chance for an imminent revival.
Global Payments was up 4% Monday, to $203 a share. FIS was down 6%, to $136. A spokeswoman for Global Payments declined to comment. FIS did not immediately respond to a request for comment.
Barron’s was bullish on both stocks in a cover story in September, along with PayPal Holdings (PYPL), Mastercard (MA), and Visa (V).
One hurdle to a deal may have been getting it through an antitrust review. The industry has already consolidated sharply in the last 18 months: Global Payments bought TSYS, and FIS acquired Worldpay. Another big player, Fiserv (FISV), swallowed First Data.
Global Payments and FIS process card transactions and electronic payments for banks, and they provide the back-end technology and card readers for bricks-and-mortar retailers, a business known as merchant acquisition. They also handle e-commerce payments.
Global Payments is about half the size of FIS in annual revenue, but it is a bigger player in merchant acquisitions and has relationships with international banks and merchants. That would help diversify FIS, which primarily handles processing for banks and capital markets, though it also has a global platform with Worldpay.
The slowdown in U.S. retail sales and closures of bricks-and-mortar stores and restaurants as a result of the pandemic has pressured merchant-acquiring revenues for Global Payments. Earnings are expected to be essentially flat this year compared with 2019, though they would be down sharply without the contribution from TSYS, which contributed $3.1 billion in revenue and $385 million to operating income through the first nine months of this year.
Wall Street would love to see FIS swallow Global Payments. A $70 billion equity valuation would value the companies at 13 to 14 times enterprise value to Ebitda (earnings before interest, taxes, depreciation, and amortization), based on 2022 estimates, according to Wolfe Research analyst Darrin Peller. That would imply a premium of 7% to 8% over recent prices of both stocks.
If the deal were done purely in cash and equity, without adding debt, it would imply that the stocks should trade at 15 to 16 times EV/Ebitda, a premium of 18% to recent prices. He views that premium as warranted because of the expected synergies and cost savings arising from a merger.
Indeed, payment processing is highly scalable and attractive for consolidation. Payment-processing companies that merged have sharply reduced operating costs, supporting higher margins. Moreover, companies can leverage their banking and merchant relationships, creating a stronger “network effect,” Peller writes.
Adding Global Payments would lift FIS’s top line revenue by 0.50 to 1 percentage a year, he estimates, on top of FIS’s current 7% to 9% growth targets. Combined with cost savings and other synergies, he estimates that would add 10% to FIS earnings per share in 2023 at a $70 billion valuation, using 30% in cash and 70% equity to fund the deal.
Write to Daren Fonda at daren.fonda@barrons.com
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December 21, 2020 at 11:15PM
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Why Wall Street Would Love to See a Merger of FIS and Global Payments - Barron's
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