GPN provides transaction processing services, directly or indirectly, to merchants, independent sales organizations (ISOs), and financial institutions.  GPN’s core business is providing “merchant acquiring” services that enable merchants to accept card-based payments (debit, credit, etc.) at the point-of-sale. GPN processes Visa, MasterCard, Discover, and JCB branded transactions for its customers.

GPN is the sixth-largest merchant acquirer in the U.S., the third largest in the U.K., and the second-largest acquirer in Canada. The company also has significant exposure to Continental
Europe and Asia where it is a top-three independent acquirer in each market. It also has emerging operations in the Brazil payments market. 

In the US and Canada, GPN made a strategic decision early on to focus on the ISO channel. As a result, GPN has greater exposure to the ISO channel relative to other acquirers, with less emphasis on direct sales and bank referral partners. A significant percentage of GPN’s merchant base is small and medium size businesses, which historically are not easily reached by national sales forces.  GPN's focus on the ISO channel is a bit of a double edged sword.  On the one hand, the reliance on ISOs relieves GPN the need to build a direct sales force and reduces its risk to credit issues stemming from small merchants.  On the other hand, margins from the ISO channels are typically lower and GPN appears more susceptible to pricing competition.

GPN's revenue and EBITDA (2012) mix include:

• Revenue: US (56%); Canada (15%); Europe (22%); Asia (7%)
• EBITDA: N America (55%); Int'l (45%)

• Attractive business model with strong secular growth and improving ROIC prospects
• GPN will likely generate over $300-350 mm in cash in each of next 2 years
• Increasing presence in international markets (45% of revenues) with higher margins (30% vs 16% N. American operating margins)
• GPN should benefit from secular growth of continued shift from paper to plastic
• M&A target – creates downside protection.  Deals considerations in the space have typically been for 8-10x EBITDA
• Private equity has been active in the space.  Advent Int'l had very successful acquisitions of RBS Worldpay and Fifth Third's Merchant Acquiring business (nenamed Vantiv and IPO'ed earlier this yr).
• GPN would make an ideal target for Fiserv (FISV). Its services are very complimentary to FISV's suite of core banking offerings.  Also, GPN's current president (previous Goldman banker) was FISV's banker.
  

• Reliance on ISO channel in US and Canada (lower margin business)
• Low credit penetration in international markets may result in longer payback period for investments (takes longer to get achieve economies of scale)
• Recent security breach is a black eye for management reputation and could cause some delay in new customer wins

VALUATION

• GPN currently trades at ~10x FCF (2013), 11x PE and 6x EBITDA. 
• Stock trades at 25% discount to its historical average multiples and about 20-30% discount to its comps
• I believe the stock can trade closer to 14x forward EPS and FCF once margins begin showing improvement.
• Target price of $60-65 implies 14-15x forward FCF.

COMPS