Digital Transactions Authoritative, insightful and timely information for payments professionals
By Jim Daly
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The merchant-acquiring industry might soon get another publicly traded company should independent sales organization Mercury Payment Systems Inc. follow through on plans to sell a minority stake in the company.
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Durango, Colo.-based Mercury on Friday filed a registration statement, or S-1, with the Securities and Exchange Commission for an initial public offering of common stock. The company hopes to raise $100 million, although the filing doesn’t say how many shares will be sold or at what price. Net proceeds after underwriting expenses will be used to acquire interests in the company from existing owners.
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Mercury Payment Systems Inc.’s operating subsidiary, Mercury Payment Systems LLC, currently is 62% owned by an affiliate of private-equity firm Silver Lake that paid $450.6 million in 2010 for its stake. After the IPO, Silver Lake and Mercury’s three founders—brothers Jeffrey and Marc Katz along with Laurence Stone, an early investor in the company, would continue to own a majority of the voting shares.
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Companies typically go into so-called quiet periods after filing registration statements. Mercury declined to comment to Digital Transactions News about the IPO.
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The Katz brothers founded Mercury in 2001 on the idea of marrying business-management applications with payment services for small and mid-sized merchants. From 7,000 merchants generating 63 million transactions and $2 billion in charge volume in 2005, the company grew to 88,000 merchants that spawned 1.19 billion transactions and $34 billion in charge volume last year. Mercury reports net income of $42.7 million for 2013, down 8% from $46.5 million in 2012, on revenues of $237.3 million, up 17% from $203.3 million.
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Mercury works with 600 application developers and 2,430 dealers that distribute its payment services for use in integrated point-of-sale, or IPOS, systems. The S-1 says this IPOS strategy dubbed the “Mercury model” can carry the company forward in a highly competitive market.
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“[Small and mid-sized businesses] typically lack the in-house technical capabilities and personnel to configure and support their IPOS systems and manage integrated payments,” the S-1 says. “Thus, they often rely on a local dealer to help them select an IPOS system and configure and support their retail technology environment. In the Mercury model, we incentivize our dealers to refer Mercury for payment processing services by offering recurring commissions and specialized IPOS customer support for them and their merchants.”
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Smaller merchants want more sophisticated IPOS systems because of the possibilities created by declining computing costs and the growing availability of tablet computers and higher-quality, industry-specific software applications, Mercury says. The company estimates it has penetrated less than 10% of the more than 1 million merchants served by its network partners. “We believe we are well-positioned to capitalize on this large market opportunity as merchants upgrade to IPOS systems,” the filing says.
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Risks abound, however. The S-1 notes that other merchant processors are eyeing the same market, including PayPal Inc. and Square Inc. And acquiring giants First Data Corp. and Heartland Payment Systems Inc. have stakes in specialty companies—First Data owns Clover and Heartland has a stake in Leaf—that combine tablet-based IPOS services with payments.
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Mercury also could hit potholes as its transitions to an in-house processing system after getting most of its front-end services and all of its back-end processing from Atlanta-based Global Payments Inc. “Converting merchants to our in-house front-end system presents a range of new technical and operational risks, including system performance and accuracy,” the filing says. “In performing back-end processing functions, we will commence a different type of business relationship with Global Payments. This presents new technical and operational risks, including the deployment of new business processes between our companies and risks associated with the interactions of our separate systems.”
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Wells Fargo & Co., through Global Payments, has been Mercury’s indirect sponsor into the bankcard networks. Under a July 2013 agreement with Global governing the transition to the in-house system, Wells will become the company’s direct sponsor bank.
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Mercury is embroiled in a lawsuit with Heartland, which in January accused it of unfair trade practices and deceptive advertising. The S-1 says Mercury’s formal response is due April 1 in the federal court in San Francisco, but gives no details about Mercury’s defense arguments. “We intend to vigorously defend against this suit,” the filing says.
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After the IPO, Mercury’s shares will trade on the Nasdaq under the ticker symbol “MPS.”
