EPS Growth Is Coming, But Synergies Are Already Priced Into Global Payments' Heartland Acquisition

• Global Payments Inc GPN shares have been on an uptrend through 2015, and have gained 77 percent year-to-date.
• Morgan Stanley’s Vasundhara Govil maintained an Equal-weight rating on the company, while raising the price target from $65 to $68.
• While the acquisition of Heartland Payment Systems, Inc. HPY is expected to support mid-teens EPS growth over time, Global Payments’ shares already reflect near-term synergies, Govil stated.

The Heartland acquisition is aligned with Global Payments’ strategy to expand its presence in the US, increasing its vertical footprint and developing deeper software specialization within the OpenEdge platform, analyst Vasundhara Govil said.

The deal also helps create cross-sell opportunities, with the potential to deliver the combined leading technology-based solutions to clients worldwide. “Given integrated payments has so far taken off meaningfully only in the US, Australia, and New Zealand, it leaves GPN with plenty of greenfield expansion opportunity over time,” Govil wrote.

The analyst pointed out that although both companies had been focusing on the SMB merchant segment, there is limited overlap across their direct distribution channels. OpenEdge derives below 5 percent of its volume from verticals in which Heartland has a strong presence, like restaurants and hospitality.

“GPN is also poised to benefit from exporting HPY's unique direct sales strategy into new markets where it is growing its sales force,” Govil mentioned, while adding that the Heartland acquisition is expected to support organic mid-teens EPS growth over time. She noted, however, that the near-term synergies were “largely priced in.”

Global Payments has projected $50mn of synergies in FY2017 and $125mn of annual run-rate synergies thereafter. “After costs of funding the transaction, this is expected to translate into EPS accretion in the mid-single digits in FY2017 (or ~$0.22-0.23) and double digits in later years (we estimate ~$0.50-$0.55 by F19),” the Morgan Stanley report noted.