Payment processor Vantiv Inc. announced late Monday that it has struck a definitive agreement with the majority owner of tech-oriented independent sales organization Mercury Payment Systems LLC to buy Mercury for $1.65 billion in a debt-funded transaction. Durango, Colo.-based Mercury is suspending plans it disclosed in late March for an initial public offering of stock in which it hoped to raise as much as $1 billion or more.
Mercury is 62% owned by an affiliate of private-equity firm Silver Lake, which paid $450.6 million in 2010 for its stake. Vantiv, based in the Cincinnati suburb Symmes Township, Ohio, says Mercury chief executive Matt Taylor and his management team will remain with the company, which will stay in Durango.
The deal will further strengthen Vantiv’s presence among small merchants and in so-called integrated payments sold by third parties. Mercury is known for its network of some 600 software developers and about 2,400 value-added resellers/dealers that integrate its payment-processing services into their applications for businesses.
“We estimate it is equivalent to 13,000 feet on the street,” Charles Drucker, Vantiv’s president and chief executive, said in a conference call. “Vantiv and Mercury will create a winning combination of technology, distribution and scale that we believe is unparalleled in the industry.” He added that Mercury has penetrated only about 10% of the merchants served by its network. Mercury’s 2013 merchant count was 88,000.
Vantiv, founded by Fifth Third Bancorp, is the nation’s third largest merchant acquirer and already owns NPC, a processor for small and mid-sized merchants, and another ISO, Element Payment Services, whose services include security offerings and systems for Europay-MasterCard-Visa (EMV) chip cards. In 2012, Vantiv bought prominent card-not-present processor Litle & Co.Vantiv itself had an IPO earlier that year.
Taylor said Vantiv will bring scale to Mercury and enable it to reach merchants and market sectors that would be difficult on its own. “There are features on Vantiv’s platform that we don’t have today,” he said.
With its strong position in the fast-growing integrated-payments sector, Mercury’s transaction count has grown at a 44% compounded annual rate since 2005, hitting 1.19 billion last year. Charge volume totaled $34 billion, up 17% from $29 billion in 2012. The company reported net revenues of $237 million in 2013, up 17% in a year, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $93 million, up 23%.
The deal does have some potential downsides. Some analysts questioned Drucker about possible conflicts with Vantiv’s existing ISOs and channel partners. The CEO said Vantiv could “manage through” any issues.
And one analyst asked about the lawsuit that merchant acquirer Heartland Payment Systems Inc. filed in January against Mercury, accusing the processor of deceptive sales practices. Drucker said Vantiv considered the suit as part of its due diligence. “We intend to continue to defend this vigorously,” he said.
Vantiv said it has “committed financing” for acquisition, which will be funded entirely with debt. But chief financial officer Mark Heimbouch said the average cost of the financing is only a shade over 3%. “The cost of capital to fund this transaction is very attractive,” he said on the call. “We expect to de-lever very quickly.” Vantiv expects to close the deal by June 30 pending regulatory approvals.