When Global Payments announced the purchase of Sicom, a private equity rollup of restaurant solutions, for $415M people were scratching their heads. Sicom offers a portfolio of products across 25,000 stores, predominantly in QSR (quick service restaurants) and food service management, but it’s not exactly clear where the fast win for Global Payments comes from.
That said, let us attempt to break this transaction down.
The first thesis is one of Big Co growth. When companies get to a certain size it gets really hard to grow by any material number. When you’re doing $1M a year in revenue, getting another $1M, or doubling in size, is pretty easy. When you’re doing $1B in revenue it’s much, much harder to find another $1B of organic growth. So companies of this size often buy other companies as a way to find it. If nothing else it’s because doing deals is fun and bankers love making their 6% – even if the transaction never pans out. Often these decisions are catalyzed by boards who feel that the company isn’t doing enough – as if they even know what enough really means. We’ve discussed this battle of egos previously.
Suffice it to say under this thesis Global needed to buy something to find growth.
The second thesis is more rational. This thesis contends that Global acquired a piece of technology or customer base in Sicom that it couldn’t build at a reasonable cost or in a reasonable amount of time. This is a pretty traditional PE (private equity) roll up thesis too: buy a bunch of solutions in the same industry, consolidate market share, and then cross-sell the products into all the companies represented by these solutions. HotSchedules is a great example of this effort in the restaurant vertical, though we don’t think it’s going as well at TPG thought it would when they started the exercise 5 years ago.
It’s this second thesis that gives us a bit of pause.
The first hesitation we have is with the purchase price. Sicom claimed 25,000 merchants. Now it’s entirely possible they had other merchants using different solutions that make this footprint larger, but this is the core base of merchants that were using Sicom’s digital signage product: a hardware business with some content management components sold as SaaS. At 25,000 merchants Global paid $16,600 per location. When Heartland Payments (who Global now owns) bought restaurant POS companies Digital Dining, Dinerware, PC America and Xpient they paid an effective purchase price of $400 to $1,000 per location.
Why the massive increase?
For starters there was SaaS revenue involved at Sicom. The legacy POS companies Heartland acquired were still on a perpetual license model. Fingerprints, which Sicom purchased from Posera, and Sicom’s content management for its digital signage were sold or at least transitioning to a recurring revenue (SaaS) model. Sicom’s kitchen IoT product was also sold as SaaS. Sicom had close to $50M of SaaS revenue according to one source and SaaS today is trading at ~7x LTM revenue. At an assumed fair valuation of $16,600 per store that implies each of Sicom’s locations was earning $2,767 in annual recurring revenue, or $231 per month.
Does Global think it will increase this number?
The QSR segment is on the decline and QSR merchants operate with the lowest margins in the entire industry. Implicitly getting more than $200 per month per store is going to be really, really challenging. Even transitioning these merchants to payments processing, which is generously 100% gross profit, doesn’t earn much money as the likes of Burger King and Tim Horton’s – Sicom’s staple customers – negotiate very low rates with their processing volume. So there’s something we might be missing here.
The second hesitation comes in our analysis of true product carry over. Xpient already has a back office system and Xenial has been working on some of the components for a while. RTI, which Sicom acquired and rolled into its own back office offering, was not exactly a modern, web-enabled product. Is Sicom’s offering that much better than what Global already had and continued throwing development resources behind?
What Global didn’t yet have was Sicom’s kitchen management system and digital signage. The kitchen system is a hybrid IoT (internet of things) tool which can forecast inventory needs. Mathematically speaking it’s not exactly earth shattering – forecasting solutions have been used in supply chains in other industries for decades – but we need to remember that restaurants are several hundred years behind everyone else and only a few back office providers offer anything meaningful here. Meanwhile Sicom’s digital signage product is predominantly a hardware business with some hardware maintenance services and recurring content management software fees. Digital signage won’t be confused with anything scintillating but if you’ve been to a fast food restaurant you’ve undoubtedly used the digital signage to make an ordering decision.
The third hesitation, which we are prone to re-referencing because nobody seems to pay any attention to history nor our persistent writings for that matter, is that you cannot be everything to everyone. Aloha doesn’t have a functioning API, partner program, or replacement cloud POS because they tried to build everything behind their walled garden. We can go on and on with examples in technology, energy, and manufacturing – industries where the customer is much more sophisticated and margins much higher (i.e. opportunities for much higher chances of success) – but why bother since it’s obviously not sinking in.
Through this acquisition our concern is that Global might be embarking on a similar walled garden approach where they’ll attempt to own the entire solutions stack. Not walled garden in the sense that they’ll make third party integrations impossible (as was done at Micros and NCR) but that they’ll lose focus of their core value and offer non-core solutions in an attempt to increase the revenue stack on each merchant. Our rationale for this outcome is pretty straight forward: Sicom is fundamentally a hodgepodge of hardware DNA that’s now folding into Global’s payments culture. While Global is trying to change that (and have rightfully kept software acquisitions as separate as possible), we believe software initiatives will continue to be challenged. Unless they can somehow develop and retain a software culture there are simply too many examples for how this plays out.
Then again these Tier 1 customers are really sticky. They don’t often go belly up and have been the same culprits that hold onto their POS systems for 15 years. That means their relationship is probably worth a good deal, which bring us to our closing position.
If you were to ask us why this transaction happened we’d say it’s to deepen Global’s relationships with major QSR brands, especially internationally. Global acquired many of these contacts through its acquisition of Xpient, an enterprise POS solution, but is finding some of these brands leaving for POS competitors like Brink, a cloud POS successfully servicing major QSR brands like Arby’s, Dairy Queen, and Five Guys.
We would argue that the company that “owns” the customer relationship is not the one looking to pile on more of their homegrown (and often subpar) solutions but one that instead solves the customer’s problems – even if that means bringing in a third party with a better mousetrap. This latter approach is best accomplished with open APIs and partnerships that deliver innovation at a faster pace. By the way, until this point Heartland/Global has had an entirely neutral stance on their POS API partnerships, so that does build some goodwill.
And Global hasn’t announced that they’re shutting off third parties either… but we must be honest: Global needs to find a return in their Sicom investment and that means placing more of their solution stack with existing customers. Our argument would be that this most probably comes at the expense of higher quality solutions from third parties in some (but not all) cases.
Even if you have never bothered to read a book you intuitively know that everything you own is not supplied by only one company. Ignoring that can be perilous, as we have documented in too many case studies to count. Hopefully Global can avoid these pitfalls; we’ll just need to wait and see.
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