The race in the payment industry continued Tuesday as Global Payments (GPN -1.16%) agreed to buy Total System Services (TSS) in a stock deal valued at $21.5 billion. It's the third major merger in the sector so far in 2019, and a clear indication of the importance of scale in this evolving global market.
Terms of the deal call for investors in Total System to receive 0.8101 shares of Global Payments for every share they own, or about $119.86 per share, a premium of about 20% to Total System's close on May 23 before rumors of a potential deal leaked. When the deal closes, Global Payments investors would own 52% of the combined company.
Global Payments CEO Jeff Sloan will run the combined company, with Total System CEO Troy Woods taking the role of chairman of the combined board.
The merger follows in the footsteps of Fidelity National Information Services' $34 billion deal for Worldpay and Fiserv's $22 billion purchase of First Data, each announced earlier this year.
Here's a look at the new Global Payments, and where it stands in this rapidly changing industry.
Seeing both sides
The deal brings together the two sides of a card transaction. Total System ranks as a top third-party processor for U.S. credit card issuers, while Global Payments is a top-five provider of tools to handle card payments for merchants. The companies are chasing a bigger share of the nearly $100 billion in annual merchant swipe fees.
Upon closing, Global Payments said it would process more than 50 billion transactions annually in 38 countries physically and over 100 countries virtually, serving nearly 3.5 million merchant locations globally.
Payment processing until recently was a predictable, stodgy business. But the arrival of upstarts, including Square, that are able to gather data from both sides of a transaction and offer additional products and tools for lenders and merchants, has sparked incumbents to go on the offensive.
"The combination ... establishes the leading pure play payments technology company with unparalleled vertical market and payment software capabilities and e-commerce and omnichannel solutions, operating at scale in fast-growing markets globally," Sloan said in a statement. "This transformative partnership accelerates our technology-enabled, software-driven payments strategy and provides exposure into attractive and complementary businesses, while enhancing our financial strength and flexibility."
Global Payments and Total System Services said they expect to extract about $300 million in annual cost savings, and generate $8.6 billion in annual adjusted net revenue and $3.5 billion in adjusted EBITDA. Post-deal, Global Payments expects about $2.5 billion annual free cash flow, enough it says to keep its investment-grade credit rating and preserve Total System's higher dividend yield.
There had been some thought that even after the two large deals announced earlier in the year, Global Payments had the wherewithal to sit back and take a "wait and see" approach to consolidation and whether combining the two sides of the transaction really would yield the strategic value the companies are seeking.
By moving now, both companies can lock in a high-quality partner instead of risking that one goes off in another direction. They are also eliminating some antitrust risk relative to their peers. It is possible that regulators could greenlight the Fidelity/Worldpay and Fiserv/First Data deals but then have regrets, making it harder for follow-on deals in a few years' time. This way, all of the deals will be considered together.
This could be the last of the megamergers in payments for now, but the three large deals could put pressure on companies including ACI Worldwide, Q2 Holdings, Bottomline Technologies, and USA Technologies to either bulk up or find deeper-pocketed partners.
Make no mistake: This deal, like the two previous large transactions, is reactionary based on the way technology is changing the payment industry and the new competitors those changes are creating. Global Payments and Total System Services are betting that, combined, they stand a better chance of being among the long-term winners.
Given their size and scale as an eventual merged company, they seem to have given themselves a solid head start.