Let’s Make a Deal

It’s been a busy year on the M&A front for merchant acquirers. What’s driving the deals, and what’s ahead in 2018?

The year is coming to a close with nearly $14 billion in mergers and acquisitions either announced or completed in the merchant-acquiring industry. The number of deals could easily match or exceed 2016’s deal count, and the average size this year is up 26%.

Industry executives expect all of the forces driving 2017’s deals to remain in full force in 2018.

Those M&A drivers include the eternal quest for scale to push per-transaction costs down, the effort to close product or geographic gaps, opportunities for pairing up with high-growth independent software vendors (ISVs) and related companies, cross-border plays, and the quest for unexploited niche opportunities.

What’s more, plenty of financing is available.

“It seems there’s no shortage of private-equity money right now,” says Henry Helgeson, cofounder and chief executive of Boston-based merchant processor Cayan LLC. Last May, Cayan bought Card Payment Services (CPS), an independent sales organization specializing in serving small waste haulers. “I think 2018 is going to be hot.”

Another acquirer executive who made a significant acquisition this year, Marc Gardner, president and chief executive of Troy, Mich.-based North American Bancard, also predicts more of the same. NAB bought Woodland Hills, Calif.-based rival Total Merchant Services in June for an undisclosed price.

“In 2018, the consolidation within the payments industry will not slow down,” says Gardner in an email to Digital Transactions. “There will continue to be significant plays made to acquire the necessary pieces to assemble a comprehensive suite of payment-processing services for merchants. The digital world has created a bevy of options for merchants, so tailoring solutions for businesses is of greater importance now than it has ever been.”

The ‘Disappearing Middle’

The $13.9 billion M&A total calculated by Digital Transactions comes only from publicly announced deals that included a price. Such deals tend to be the largest. As always, many small acquisitions go by nearly unnoticed, and some, especially those involving privately held firms, do not disclose purchase prices.

The total rises to $15 billion when two deals involving Mastercard Inc. and Visa Inc. are included: Mastercard’s May acquisition of a 92% share of the United Kingdom’s faster-payments system operator Vocalink Holdings for $929 million (with another $220 million payment possible if Vocalink meets revenue goals in 2018), and Visa’s $302 million acquisition of CardinalCommerce, a vendor of risk-control technology for online commerce.

Annapolis, Md.-based First Annapolis Consulting says that as of early November there had been 37 deals in 2017 involving acquirers, with an average deal size of $366 million. That’s just two shy of the 39 deals in all of 2016, which averaged $291 million.

Buyers are paying a lot more, too. In 2016, the average multiple paid was 11.8 times earnings before interest, taxes, depreciation, and amortization (EBITDA), according to First Annapolis. In 2017, the multiple is up to 15.3.

At the same time, so-called mid-tier acquirers are getting squeezed. Such acquirers, which First Annapolis defines as those with $10 billion to $100 billion in annual payment volume, are seeing their market share shift to the industry’s Top 10 processors or even to some nimbler, smaller players.

1. Marc Abbey, managing director of payment acceptance at First Annapolis, says the mid-tier players controlled 23% of the U.S. market in 2012, but soon “that mid-tier is going to control less than 10%.”

“There’s kind of a disappearing middle,” says Abbey, whose firm is now part of the global consulting company Accenture plc.

Part of the reason for the mid-tier shrinkage is that a good mid-size processor is a good merger candidate. Cayan’s Helgeson believes prices are rising for merchant acquirers because buyers are having a harder time finding smaller ISOs and processors that have the ISV relationships or quality products that are in high demand today.

“The problem is there’s very few left that have any value,” he says. “There is some scarcity value right now.”

‘Right Place, Right Time’

The biggie deal of the year is the pending $9.9 billion acquisition by suburban Cincinnati-based Vantiv Inc. of London-based acquirer Worldpay Group plc, which was announced in July and awaits regulatory approvals. The deal checks off a number of boxes on the M&A driver list, including scale and filling product and geographic holes.

The combined entity will process more than $1 trillion in payment volume annually, and Vantiv, nearly all of whose business is U.S.-based, will gain a major presence in Europe. “That was a significant gap for them,” says Jared Drieling, director of business intelligence at payments consultancy The Strawhecker Group, Omaha, Neb.

Vantiv also will get Worldpay’s Atlanta-based U.S. operation, which serves about 115,000 merchants.

Worldpay, meanwhile, will be able to bring Vantiv’s extensive e-commerce and integrated-payments services to its merchants. “There was a [product] diversity play as well,” Drieling adds.

Scale was a big factor in the North American Bancard-TMS deal. TMS will add about $12 billion in annualized volume to NAB, putting the combined entity at $50 billion and serving about 500,000 merchants.

“First and foremost, NAB is always looking at new ways to grow its existing footprint,” says Gardner. “The opportunity came about through a combination of ‘right place, right time,’ and realizing the incredible synergies between TMS and NAB.” He adds that TMS’s business values “aligned perfectly with NAB’s, so it made the acquisition a natural fit for both companies.”

‘A Great Opportunity for Us’

Other acquisitions involved ISVs and so-called integrated payments providers, one of the hottest areas in merchant acquiring as processors seek out new payments business through partnerships with software developers that supply merchants with business-management applications. The Strawhecker Group estimates there are up to 15,000 ISVs in the U.S., says Drieling.

Integrated payments were a factor in several deals, including EVO Payments International’s buyout of Sterling Payments, JPMorgan Chase & Co.’s deal for WePay Inc., and Global Payments’ $1.2 billion acquisition of two units of Active Network, a provider of management software for event sponsors.

Atlanta-based Global Payments was one of the first acquirers to identify the opportunities in pairing up with ISVs and related companies. Now those channels are bringing in 40% of revenues, up from 30% in 2015, and they’re heading toward 50%, chief executive Jeff Sloan said Nov. 8 during Global’s third-quarter earnings conference call.

Expanding into an under-penetrated vertical market played an important role in Cayan’s acquisition of Dallas-based CPS, which processes $700 million-plus in annual Visa-Mastercard volume generated by mostly small waste haulers and others in the waste-disposal industry, including equipment providers and municipalities.

But there was more than just payments. CPS provides software integrations and has relations with key ISVs that provide haulers with applications for routing, invoicing, and other business needs.

The small haulers served by CPS “are a great opportunity for us” as the disposal business converts to electronic payments from checks and cash, says Helgeson.

Another venue for M&A activity is cross-border payments. In late October, international payment-services provider Planet Payment Inc. reported it has a deal to be acquired by Galway, Ireland-based Fintrax Group, a multi­currency processor for international shoppers.

The deal values Long Beach, N.Y.-based Planet Payment at about $250 million, according to the processor’s financial advisor, San Francisco-based Financial Technology Partners LP.

Founded in 1985, Fintrax Group operates in 34 markets and provides dynamic currency-conversion services that enable cardholders traveling abroad to pay for goods and services in their own currency. The company also processes refunds on value-added tax purchases, and provides specialty treasury and foreign-exchange services to merchant acquirers.

“The acquisition of Planet Payment will expand our ability to serve global customers, particularly in the U.S., Canada, the Middle East, Latin America, China, and Southeast Asia,” Fintrax chief executive Patrick Waldron said in a statement.

Planet Payment operates in 23 countries and offers multicurrency services in addition to international payment processing. It works with 76 acquirers and processors and serves about 177,000 merchants.

Paris-based private-equity firm Eurazeo acquired Fintrax in 2015 for $641 million, according to FT Partners.

‘Land Grab’

Other deals, although not necessarily involving international processing services, involved either international buyers or sellers. The big deal here is Vantiv buying Worldpay, but in addition to the Fintrax-Planet Payment deal another example is United Kingdom-based Paysafe Group plc’s summer acquisition of Delta Card Services Inc., parent company of the ISO Merchants’ Choice Payment Solutions, for $470 million in cash.

Shortly after the Merchants’ Choice deal became public, Paysafe itself announced that it would be bought out by affiliates of the private-equity firms Blackstone and CVC Capital Partners for $3.9 billion. And two other U.S.-based private-equity firms, Advent International and Bain Capital, announced in January that they would buy the German payment service provider Concardis GmbH for an undisclosed price.

“It’s consistent with the theme that I kind of believe—that there’s a global payment-processing play, land grab,” says consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures.

The Paysafe and Concardis acquisitions also show just how active private-equity firms have been in payments in 2017. This year’s buyers include 28 so-called strategic buyers, such as other processors, and nine financial buyers such as private-equity firms. The 2016 deals involved 35 strategic buyers and only four financial buyers, according to First Annapolis.

“The financial buyers are still very active,” says Abbey.

In yet another such deal, Chicago-based private-equity firm GTCR LLC in June acquired Sage Payment Solutions, the U.S. merchant-services arm of British software company Sage Group plc, for $260 million. The processor serves approximately 100,000 merchants.

Sage Group entered the U.S. acquiring industry in 2006 when it bought Verus Financial Management Inc., an ISO, for $325 million. Now, its exit creates an opportunity for GTCR, long an investor in payments and financial-technology companies, which account for about one-fourth of GTCR’s portfolio.

GTCR managing director Collin E. Roche told Digital Transactions News that the firm planned to allocate up to $350 million in equity capital for Sage Payment Solutions. “We’ll reinvest in this business,” Roche said.

In October, GTCR appointed veteran ISO executive Joe Kaplan as chief executive of the merchant processor. Kaplan is the former CEO of TMS and founded Innovative Merchant Solutions. He sold that ISO to Intuit Inc. in 2003 and continued running it as the payments unit of the accounting-software provider before heading TMS in 2012.

‘Transaction-Oriented’

No review of 2017’s merchant-acquiring M&A activity would be complete without noting two prominent deals by the industry’s largest processor, Atlanta-based First Data Corp. First Data never stopped making acquisitions after its 2007 leveraged buyout by Kohlberg Kravis Roberts & Co. piled $20 billion in debt onto its balance sheet, but it definitely scaled back.

Today, de-leveraging is well under way, though First Data’s long-term debt is still high—$17.8 billion as of Sept 30. But its October 2015 initial public offering and a series of refinancings have lowered its interest expense and given the company some wiggle room. Now First Data is re-emerging as one of the industry’s leading strategic buyers.

In July, First Data bought Card­Connect Corp., an ISO working in the ISV niche, for $750 million. King of Prussia, Pa.-based CardConnect already was a First Data processing client. It served 67,000 merchants and posted $22.3 billion in bank card processing volume in 2016, up 31% year over year.

First Data followed up in October with a deal to acquire Naperville, Ill.-based merchant-services provider BluePay Holdings Inc. for $760 million in cash. BluePay processes $19 billion annually for 77,000 merchants and is integrated into more than 450 software platforms.

In a November conference call with analysts, chairman and CEO Frank Bisignano said CardConnect bolsters First Data at the point of sale, while BluePay’s strength is in e-commerce. “I think we’re well-positioned for the future,” he said.

The two acquisitions counter impressions by many in the acquiring industry that the KKR buyout had largely confined First Data to the M&A sidelines.

“What First Data has done is de-lever the company,” says Cayan’s Helgeson. “That put them in this place where they could spend a billion and a half dollars. I think they caught the competition flat-footed.”

First Data isn’t just buying this year; it also lopped off some small units, such as its subsidiaries serving the Baltic nations, that it deemed superfluous.

Veteran industry observer Abbey of First Annapolis expects the dealmaking to continue in 2018, noting with a double entendre that the industry has always been “transaction-oriented,” as in “let’s make a deal.”

“There is no reason why that would stop in 2018,” he says. “Despite all the consolidation, it’s still rather fragmented.”