At the start of July, payments processing giant Vantiv Inc (NYSE:VNTV) announced that it had agreed in principle to terms that would see it acquire rival payments processor Worldpay Group. The deal, which sees the latter valued at just shy of $10 billion, represents a major consolidative move in the industry and serves to underpin an aggressive international expansion strategy for Vantiv, essentially giving the company access to an already large and well-established European client base.
JPMorgan Chase & Co. (NYSE:JPM) had previously made an offer for Worldpay before Vantiv outbid the financial services giant. The former has an opportunity to make a counteroffer (before Aug. 1) but reports suggest that it is unlikely to do so. This sets up an opportunity in the sector.
We know JPM is on the lookout for a payments processor and — against a backdrop of dramatic industry growth — this doesn’t come as much of a surprise. We also know that it has (most likely) missed out on Worldpay. This is a pretty crowded industry, but one in which only a handful of companies the with the size and established presence of Worldpay (and, by proxy, ones that might be attractive alternatives to the latter from JPM’s perspective) exist.
An allocation toward this handful of potential takeover targets ahead of the event could be a nice quick turnaround play, in anticipation of JPM paying a premium current price at takeover time. Here are three of the most viable contenders.
Mobile Payment Stocks to Buy: Square (SQ)
Square Inc (NYSE:SQ) is very much the cool, upstart type addition to this list, with the company proving to be a real disruptor in the industry since its launch in 2008. The company, which was founded by Jack Dorsey of Twitter Inc (NYSE:TWTR) notoriety, was initially built around an eponymous technology, the Square, which connects to the headphone jack of a mobile device and — in doing so — allows the owner to accept card payments.
This concept remains at the core of Square’s operations, but the company has expanded to offer a much wider suite of payment processing technology and products to its clients in recent years. It’s this wider offering portfolio that makes it stand out as one to watch in this space right now.
While other companies in this industry (for example, Stripe) generate the vast majority of their revenues from processing fees, Square has diversified its incoming streams to data analytics, microloans, instant deposit features and more. Basically, the company hooks a client with the core processing capability and then up-sells said client with its portfolio of added capabilities.
What about the numbers? During the first quarter of 2014, Square recorded a gross payment volume (GPV) of $4.6 billion through its platform. During the final quarter of 2016, this had risen to $13.7 billion — a rise across the period of just short of 200%. During the same period, quarterly adjusted revenues increased from $52 million to $192 million, or 270%. For reference here, adjusted revenues is a term used by the company to represent its top line as adjusted to remove the impact of a deal struck with Starbucks Corporation (NASDAQ:SBUX) in its early days. Actual revenues came in at $451 million for the fourth quarter of last year, but the adjusted revenues number is far more accurately representative of future growth potential.
Mobile Payment Stocks to Buy: Wirecard AG (WRCDF)
Next up, Wirecard AG NPV (OTCMKTS:WRCDF). This one is a European-based payments processor, making it comparable to Worldpay in terms of affording any suitor an immediate and established access to a European client base. The company is located in Germany and is currently priced very similarly to Worldpay, with a market capitalization in and around 8 billion euros.
Wirecard has spent the last few years trying to build on its domestic market dominance through an aggressive international expansion effort and — on the back of said strategy — has become a much more attractive and diverse offering than it once was. Central to this expansion are two regions: North America and Asia. With regards to the former, the company closed out on an acquisition of the U.S.-based prepaid card division of Citigroup Inc (NYSE:C) earlier this year; a transaction that was first announced early 2016 and took close to a year to bring to resolution.
The acquisition sees it gain access to a large and well-established base of clients in the U.S. and, in an industry where speed and consolidation are buzzwords right now, it looks to have been a smart move by management. The implications of the acquisition from a top-line perspective won’t become clear until the third quarter of this year, when we should start to see the numbers filter through to company reports. That there’s a decent uptick in top line on the cards, however, is far from an unreasonable assumption.
Looking at the latter, and again through the acquisition of a Citi portfolio, Wirecard picked up the latter’s Asia Pacific (APAC) customer portfolio for merchant acquiring back in March this year. This is a portfolio that spans 11 Asian markets and includes more than 20,000 established customers, spread across countries including Singapore, Hong Kong, Macau, Malaysia, Taiwan, Indonesia, Philippines, Thailand, India and Australia.
Again to take a quick look at the numbers, Wirecard generated 1.05 billion euros in revenues last year, up from $800 million a year earlier. The bottom line came in at 267 million euros for 2016, up from 143 million euros during 2015.
Mobile Payment Stocks to Buy: Global Payments Inc (GPN)
Closing out the list is Global Payments Inc (NYSE:GPN). This one is an Atlanta, GA-based payments behemoth that currently trades for a market capitalization of $14 billion — twice that of Wirecard and a steep premium on the $10 billion that Vantiv is paying for Worldpay (which JPMorgan already decided is too high a number).
With this one, however, JPM would be getting substantially more for its money than it would be from a Worldpay takeover. Whereas the latter generated a little over $1.12 billion in revenues during 2016, Global Payments brought in $2.2 billion during the seven months to Dec. 31, 2016, and $2.89 billion during the twelve months to end-May 2016. Net income for these twelve months came in at $271 million. Adding to the attraction is the company’s 2016 acquisition of a company called Heartland Payment Systems, which Global Payments got for $4.3 billion at close. The acquisition is expected to add around 20% to top line and a similar percentage to net income.
Year to date, Global Payments is up 35%. Go back five years and this number rises tenfold to 330%. It’s struggled to reach and/or break the $100 a share threshold over the past couple of months, however, despite numerous tests of this level as resistance. With that said, that it might warrant a takeover bid for a premium that puts it above the $100 a share mark is far from an unreasonable suggestion.
Just as with Square and Wirecard, Global Payments is primarily a company that provides the infrastructure that underpins point of sale transaction, but unlike Square, the vast majority of its operations are rooted in the traditional credit card based hardware network. In other words, Global Payments hasn’t reinvented the space, but it has built a very strong operational presence on the sector’s existing framework.
As of this writing, Samuel Rae did not hold a position in any of the aforementioned securities.
