Good on the Mizuho team for bringing financial forensics to bear on Global Payments. Mizuho’s PDF is available here and pasting below some summary text:
Summary
GPN reported results this week. While they spent $126mn in cash on M&A in 4Q, management’s comment that M&A only contributed ~10bps to 2024 guidance was surprising. We believe this may be due to GPN acquiring an ISO for which it already does payment processing, and thus already recognizes much of the revenue.
Using similar transactions from competitors suggests that GPN is potentially buying $20-25mn of EBIT. Excluding M&A, we est. ’24 pro forma margin growth guide would have been +30bps vs. the +50bps (or nearly flat in Merchant vs. +30bps guide). Lowering ’24 margin & EPS estimates. PT unchanged at $129. Remain cautious. Neutral.
Is GPN Simply Buying $20-25mn of EBIT?
GPN reported results earlier this week and provided initial 2024 guidance that calls for 6-7% adjusted revenue growth and margin expansion of up to +50bps (vs. medium-term outlook of 50-75bps of annual expansion).
Management added that a “small portfolio buy” in 4Q would contribute “less than 10bps” to 2024 revenue growth. While this may be true on the top-line, we dive deeper into the potential impact of this M&A deal to profits in 2024. We do so by examining a prior transaction in which First Data acquired an ISO that it previously had a distribution partnership with. Our findings suggest that there may be underlying margin issues at GPN.
Analyzing First Data’s 2017 Acquisition of CardConnect Helps Uncover the Potential 2024 EBIT Contribution to GPN from Recent M&A
In 2017, First Data acquired CardConnect for approximately $750mn. At the time of acquisition, CardConnect was an ISO (independent sales organization) that already had a relationship with First Data as a distribution partner. In other words, First Data had been earning processing revenue as part of the relationship.
CardConnect reported $157mn of revenue and $38mn of EBITDA in 2016 (~25% margin). Revenue was expected to grow at a mid-teens rate in FY17 to approximately $180mn (or ~$45mn of revenue per quarter).
First Data noted that “that addition of CardConnect benefited our organic constant currency revenue growth by 25bps” in 3Q17. On ~$1.82bn of 3Q16 base revenue, this implies $4-5mn of top-line benefit. This also means that (given the prior partnership between First Data and CardConnect) the $4-5mn benefit that First Data saw was just ~10% of the $45mn of total quarterized revenue that CardConnect generated.
We apply this to GPN. Management’s comment that the 4Q portfolio acquisition would add ~10bps to revenue growth in 2024 implies ~$9mn of contribution. Assuming the same 10% ratio between ISO/processor from CardConnect/First Data implies ~$90mn of actual revenue for company that GPN likely acquired.
Assuming a similar 25% margin for this business (in line with CardConnect) implies $20-25mn of EBIT contribution to GPN in 2024. See Exhibit 1.
If They Are Buying EBIT, What Does It Mean for the 2024 Margin Guide ex M&A?
In Exhibit 2, we apply our estimated EBIT contribution to GPN’s guidance and create a pro forma bridge that shows what the margin guide may have been excluding the benefit from M&A. In greater detail:
- GPN guided to $9.17-9.30bn of revenue (or 6-7% growth) in 2024. For our bridge, we use the midpoint.
- The guide calls for up to 50bps of margin expansion during the year. We conservatively assume 50bps. This implies margin at 45.1% vs. 44.6% in 2023.
- We estimate pro forma revenue at $9.226bn (e.g. $9.235mn midpoint of the guide less ~$9mn from M&A). Similarly, we estimate pro forma EBIT at $4.143bn (e.g $4.165bn based on guide less the $20-25mn estimated impact from M&A, based on the First Data/CardConnect comparison above). This implies pro forma margin at 44.9%.
- In other words, we estimate that true margin guidance (ex the M&A) would only be +30bps expansion to total company EBIT, as the portfolio buy adds ~20bps to margin growth.
- Running the same analysis for the Merchant Solutions segment suggests that 25bps of the “up to 30bps” of margin expansion guidance is driven by M&A. In other words, the guide would otherwise have been for ~5bps of expansion. See Exhibit 3.
Updating Estimates & PT
We are updating our model to reflect 4Q results and management guidance. Our 2024 margin expansion outlook of +30-40bps implies 45.0% margin (vs. “up to 50bps” guide and our prior margin estimate of 45.7%). We are lowering our 2024E EPS to $11.65 from $11.81 previously, to reflect guidance of $11.54-11.70.Our 2025E EPS is largely unchanged. We continue to value GPN at 10x our 2025 earnings estimate, which implies a PT of $129 (unchanged vs. prior). We value GPN at a several turn discount to both peer FI and its own 5-year median multiple.
Here’s what those of us operating in the industry know:
Global Payments is aggressively buying ISOs
Global Payments acquired Get Beyond, Bob Carr’s ISO. There’s oddly very little publicity on it, which might be due to Bob’s previous lawsuit with Global Payments, or because Global itself wants to call the growth “organic”.
Global payments also bought another large payments portfolio from a public POS company, and that is also surprisingly missing from the internet. Those close to the transaction said that Global made this move and intends on booking it as “organic”.
These two large acquisitions notwithstanding, Global is also aggressively pursuing smaller ISOs.
Why?
It seems pretty clear to us that Global has a revenue problem and they’re attriting merchants to verticalized software companies.
ISOs get you revenue, but not technology.
Ironically we think that the payments market will swing back into the ISO’s favor when some new software becomes available (more on that in a coming article).
In the meantime Global is stuck.
The software they purport to have isn’t even relevant, and anything they acquire they run into the ground.
Because payments culture does not make good software.
Global and Shift4 need to mate already and get it over with.
Find a price, make a deal, and then “synergize” the financials to buy yourselves some more time.
Global should just hold on until the aforementioned payments integration software becomes more publicly available and then they can really monetize their sales efforts better.
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