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Vantiv’s Stock Getting More Interesting Following Litle & Co. Acquisition

Vantiv’s third-quarter results were down the middle of the plate, but guidance was not strong enough to keep the stock in the black for the day given high expectations. Net revenue of $258.5 million was above consensus of $255.4 million and a little below estimates, while adjusted EPS of $0.32 were $0.01 above consensus and met our estimate.

Yesterday, Vantiv announced the acquisition of Litle & Co., an e- commerce payment processor, for $361 million, net of cash and debt. The transaction is expected to close before the end of the year. We believe the biggest opportunity Vantiv sees in acquiring Litle is going after the e-commerce business of its existing bricks-and- mortar merchant customers. The e-commerce market today is dominated by Chase Paymentech and CyberSource, which is owned by Visa.

Vantiv’s value proposition will be based on the ability for many of its bricks-and-mortar merchants to now use a single payment processor, which can provide front-end and back-end processing as well as integrated reporting for both the online and offline components of their businesses. In addition, management believes that despite
excellent features and functionality, Litle has to date been at a competitive disadvantage due to its limited offering, scale, and distribution; Vantiv should be able to remedy those issues, in our opinion.

To frame Litle’s financials, management said that Litle should increase Vantiv’s 2015 net revenue growth rate by a midsingle-digit percentage, assuming 4%-6% would imply Litle revenue of $40 million-$60 million. While adjusted EBITDA margins are not as high as Vantiv’s, it sounds like they are quite healthy. Assuming a margin in the 30%-40% range implies $12 million-$24 million of incremental adjusted EBITDA and incremental adjusted EPS of $0.02-$0.07, assuming the transaction is financed primarily with cash and perhaps a little revolver. Based on the above assumptions, we believe the multiple of EBITDA paid in the transaction were likely in the upper teens or low 20s, which would be fairly consistent with the multiples Visa and MasterCard paid for CyberSource and DataCash, respectively, in 2014.

If there is anything to pick on in the acquisition, it is that the deal looks expensive. In addition, Vantiv is not committing to integrating Litle into its processing platform, which may create some inefficiency. Still, the acquisition is in a fast-growing segment of the market (Litle has grown its sales volume 25% so far this year), and we view it as a highly strategic deal. It will now be up to management to justify the purchase price by taking market share away from incumbents.

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