Payments Intelligence Extract : Advantage Vantiv and Worldpay: the £9.3 billion key to worldwide processing30th October 2017
Vantiv’s impending merger with Worldpay is set to create an international payments behemoth of unprecedented size and scope. There may be some market benefits from the creation of a new global acquirer, but what was the logic behind the deal and what does the price paid suggest about the likely impact on merchants and the wider industry? In this article, we will examine the details of the deal to see where the chips may fall.
Early on July 4th, news broke of two U.S. firms’ potential interest in buying Europe’s largest acquirer, Worldpay. Just a day later, an initial agreement was announced, with Vantiv tabling an offer to acquire Worldpay for £9.1 billion in a combination of cash and shares. Vantiv was offering a 18.9% premium on the share price prior to any bid speculation, but significantly lower than the 435p price that shares were trading at the morning just before the announcement. The other firm showing interest was JPMorgan Chase, and investors were perhaps expecting a bidding war between the two U.S. payments giants to send the offer price much higher. Disappointment saw Worldpay’s shares slump 8.8% by the end of the day, although the price settled at roughly 20% higher than its average a few months prior.
Shareholder interest groups, including the Investor Forum, urged Worldpay to get a better deal or rework it as more of a merger than an acquisition. In some sense they got their way. On August 9th, a final deal was announced with an increased offer of £9.3 billion and the merged group taking the Worldpay name and brand, among some other changes to the original terms. This deal is likely to have huge implications for the future of the payments industry: could further consolidation be on the horizon? More importantly, how will merchants be impacted in the long run?
Figure 1: Worldpay share price (market high)
The 397p price per share is to be paid as follows (Fig. 2): 55p in cash, a 5p dividend, and the rest in Vantiv shares at a ratio of one Worldpay share to 0.0672 Vantiv shares. At the time of the announcement, Vantiv shares were priced at $65.06 and an exchange rate of GBP1:USD1.2967 was used to convert between the two currencies.
Figure 2: 397p Vantiv offer breakdown
U.S. visitors to the UK have been enjoying the benefits of a weak pound for months now, and it looks like U.S. firms are too. After assuming £1.4 billion in debt as part of the deal, the remaining £7.94 billion equity valuation would have been worth $10.50 billion pre-Brexit, but was only valued at $10.14 billion at the time of the announcement. For a company like Vantiv with $0.568 billion in operating income for 2016, this will have been an extremely important factor in its decision.
This merger ultimately addresses multiple weaknesses for each company, which is where the true value of the deal lies. Vantiv has assessed its business and identified major strengths in their U.S. client base and card-present transactions, along with two possible weaknesses: the lack of a global presence and the quality of its reconciliation and reporting services. Worldpay, on the other hand, is relatively weak in terms of U.S. presence, but is a market-leader in the UK and Ireland, strong in card-not-present (CNP) transactions, and has excellent reporting. The two businesses almost perfectly complement each other in this regard, which could suggest significant growth prospects for both firms in their respective weak areas. This also means that there aren’t many competition issues because the firms mostly operate in relatively distinct markets. Vantiv estimates that the recurring pre-tax cost synergies of the merger will be approximately $200 million per year, which could include the development of a single platform, universal processing technologies, and other general economies of scale, while one-off restructuring and integration costs will be $330m. Realising expected cost synergies, however, is an extremely difficult task as buyers generally overestimate the synergies a merger will yield. The benefits of the deal rely heavily on this area, and if they aren’t achieved then profits, and share price, could be negatively impacted for a number of years.
Figure 3: Full year 2016 comparison
Many large U.S. acquirers, such as Bank of America Merchant Services (BAMS) and Global Payments, are strong in card-present transactions but have failed to really crack the online and CNP environment. With CNP being an area of impressive growth and the possibility of further displacing cash and face-to-face card transactions, firms without a CNP presence must find a way to gain a foothold in the market.
In such a fast-moving industry, these players need to do this quickly if they want to benefit fully. But how can they accomplish this? The simplest answer is through mergers and acquisitions, which is exactly what the industry has seen. The trend of consolidation had already begun prior to the Vantiv-Worldpay deal, with Global Payments buying Heartland Systems for $4.3 billion at the end of 2015, TSYS buying TransFirst for $2.35 billion just a month after, and Vantiv themselves buying Mercury Payment Systems for $1.65 billion in 2014.
These deals were completed for different reasons. However, they were mostly to increase presence in the eCommerce and SME markets. With the same incentives present now as there were then, expect more large-scale activity of this kind going forward.
What is perhaps most interesting about this merger is that there is still room for significant geographic growth. The combined entity will hold a strong position in eCommerce and a dominant position in the UK and U.S. face-to-face acquiring markets but will lack a significant domestic presence elsewhere. With regulation opening up a pan-European acquiring market opportunity, there is the distinct possibility of further acquisitions.
Figure 4: Purchase volume comparison
For many international merchants, the merger across regions provides a new cross-Atlantic acquiring option, and this greater choice is surely a positive development. With this logic, any further expansion of the Vantiv/Worldpay network should therefore also be beneficial. On the other hand, an international one-stop-shop solution might have a darker side as it may command increased fees for merchants with increased convenience being the justification. Due to a lack of truly global acquiring solutions currently, these new international acquirers might be tempted to implement higher fees in the face of low competition. With Vantiv valuing Worldpay at a price-to-earnings ratio of over 60, they clearly see the potential for profits to grow in the future. Could the source turn out to be higher prices for merchants?
Merchants should also remember that when considering a regional acquirer, it’s not just about price. In contrast to local players, international acquirers often struggle to accommodate localised payment methods. Some key markets rely heavily on local payment services, such as Girocard in Germany, and merchants that do not accept them risk losing out on significant revenue.
Another way for firms to grow is to vertically merge and own a gateway, terminal provider or any other type of firm in the payments supply chain, such as Global Payments buying Realex Payments, a gateway, for $125 million in 2015, or Barclaycard buying The Logic Group, a loyalty and rewards specialist.
This allows acquirers to offer a more end-to-end solution to merchants, as well as being able to produce standardised reporting for the overall service — a great convenience and benefit for all sizes of businesses. Firms that seek to grow in this way may be able to charge a premium price until their competitors catch up.
In addition to the previous reasons for merging, improving international acceptance rates is a major consideration for large acquirers. In creating global solutions, acquirers could connect different pieces of the card supply chain in different regions with greater ease, and thus improve the number of correctly processed transactions. For merchants, any increase in acceptance rates is positive, with the possibility of significantly boosting revenues.
For merchants, the prospect of international acquiring solutions emerging from industry consolidation could be attractive. Being able to negotiate the entire payments process with one supplier could significantly reduce resources spent on contract management, as well as allowing for a complete end-to-end overview of the process from consolidated reporting. With competition in this market limited, for now, suppliers of global solutions may feel justified in charging a premium for the service. Whether this more than offsets the relatively unmeasurable benefits to merchants of the solution remains to be seen. Consolidation means acquirers will be under mounting pressure to increase profits from shareholders looking for an immediate return, and merchant fee increases are the easy answer. Overall, the final impact of this deal will be felt many years from now — and almost certainly felt by the entire industry.