Ladies and gentlemen, thank you for standing by, and welcome to Global Payments' Investor and Analyst Conference Call. [Operator Instructions] As a reminder, today's conference will be recorded. At this time, I would like to turn the conference over to your host, Executive Vice President and Chief of Staff, Jane Elliott. Please go ahead. .

Thank you. Good afternoon, and welcome to Global Payments' conference call to discuss our acquisition of Heartland Payment Systems. We will also discuss our second quarter financial results and provide updated guidance for fiscal 2016. Accompanying slides are available via our webcast.

Following the filing of our transcript of today's call with the SEC, a webcast replay will also be available on Global Payments' Investor Relations website. .

This call is scheduled for 1 hour, and joining us today on the call are Jeff Sloan, our Chief Executive Officer; Bob Carr, Chairman and Chief Executive Officer of Heartland Payment; David Mangum, our President and CEO; and Cameron Bready, our EVP and CFO. .

Before we begin, I'd like to remind you that some of the comments made by management during the conference call contain forward-looking statements and actual results could differ materially from these statements.

Factors that could cause actual results to differ are discussed in our note about forward-looking statements in the press release we issued today and our and Heartland's SEC filings. .

In addition, some of the comments made on this call may refer to non-GAAP financial measures. Reconciliations to GAAP results are included in the press release we issued today, which are available on our website at investors.globalpaymentsinc.com. .

Now I'd like to introduce Jeff Sloan.

Jeff?.

Thank you, Jane, and thanks, everyone, for joining us this afternoon on short notice. We are delighted to announce that Global Payments has today entered into a definitive agreement to acquire Heartland Payments in a landmark transaction for the payments industry. .

I am pleased to be here with Bob, and together, we will discuss the strategic rationale for this combination. Cameron will then review the financial details of the transaction and also discuss our second quarter earnings and our now raised guidance for fiscal 2016. .

This partnership will be a major milestone for Global Payments, transforming us into the leading provider of integrated payments technology solutions worldwide. Importantly, the transaction also positions our company as a leading provider of payment solutions for small to medium-sized enterprises in the United States.

The merger combines 2 of the fastest organic revenue growers in payments and offers the opportunity to further accelerate revenue growth, margin expansion and cash earnings per share growth. .

We believe that we can accelerate revenue growth by 100 to 200 basis points annually over time through substantial revenue enhancements.

We also plan to realize the benefits of the best of both of our companies, which we expect to generate cost synergies of at least $50 million in our fiscal year 2017 and approximately $125 million annually thereafter. .

At our recent investor conference, we reviewed the progress against our strategic scorecard as well as the opportunities to accelerate transformative growth across our markets. We believe this transaction meaningfully enhances both of those objectives.

First, the partnership adds more than 1,400 sales professionals and 300,000 direct merchants, allowing us to further grow and control distribution in the United States, our largest market. .

Second, we believe we can leverage Heartland's products and services globally. For example, Heartland's Campus Solutions business has a growing presence in the higher education market overseas, as do we. By combining our global sales capabilities with the Campus Solutions platform, we expect to grow far faster together than we can separately. .

Finally, we believe we can accelerate growth in integrated payment solutions by combining OpenEdge's unique partner integration, marketing and distribution capabilities with Heartland's deep technology and expertise in hospitality point-of-sale solutions.

Many of these point-of-sale solutions have overseas capabilities as well, which we can pair with our acquiring presence in 29 countries to drive additional growth. These solutions will be integrated with our existing investments in globalizing OpenEdge, as we discussed extensively during our investor conference. .

Before I turn the call over to Bob, I want to highlight the importance of our common culture and the critical role of our employees in the success of this transaction. Each of us shares the view that our people come first and that neither of our businesses would have achieved the successes that it has enjoyed without our dedicated employee bases.

To that end, we plan to retain the Heartland name, Merchant Bill of Rights and Sales Professional Bill of Rights after the transaction. .

Finally, it's worth a moment to reflect on the amazing job Bob and his team have done, building a Fortune 1000 company in the payments industry. I personally know Bob for 15 years and have watched him build this innovative high-growth company that we look forward to welcoming into the Global Payments family.

I will now turn the call over to Bob for his thoughts. .

Thank you, Jeff. It's a privilege for me to be here with Jeff Sloan and the leaders of his management team. I'm excited because this merger meets so many of my personal goals for the future and the succession of the leadership of Heartland. .

First and foremost, it was important for us to find the best possible home for Heartland's 4,588 employees, including our world-class sales organization, our best in the industry IT team members and the most outstanding customer service organization in the industry.

We have learned and grown a lot over the years at Heartland and we have much to be proud of. .

The deal clincher for us was when Jeff and David Mangum and Cameron Bready agreed to operate our business in the U.S. under the existing Heartland brand, the most respected brand of all U.S. processors.

We will continue to operate with our fair dealing culture with the foundation provided by the Merchant Bill of Rights and the Sales Professional Bill of Rights. We will perpetuate the best commission sales compensation model on the planet with signing bonuses and residuals and portfolio equity.

This will allow our employees to continue to be treated with the same level of respect they have been treated with for the past 19 years. .

Our customers will be in great hands because we will be using the innovative tools and industry-best facilities that we operate our businesses in today. What I feel very exciting is that we will no longer be restricted to doing business in the 50 states. We will be able to sell into Canada finally, and U.K.

and other countries, where we have ISV customers but no ability to process their payments today. This will be a powerful advantage for us for so many of our customers and sales professionals. .

And our investors will profit immensely from this transaction. We started out with the stock price of $0.60 back in 1997. We went public in 2005 with the price of $18, and that climbed to $33 in less than 2 years. And then of course, we hit the double whammy of the economic collapse and our breach. Our stocks fell to $3.45 in March of '09. .

I think our investors are going to be very pleased with this transaction at $100 per share. But just as important is the incredible opportunity this combination provides our employees to become a part of what I believe will become the most valuable payments company in the world.

The combined power of Global and Heartland is going to surprise a lot of the industry watchers. Upon closing, we will continue with not only our name but our traditions and history of providing unmatched customer service, having the most innovative products. And our employees will continue to say, "This is a great place to work.".

I am so very proud of all we have done and where we are going. The future is indeed bright. And now, back to Jeff. .

Thanks, Bob. Together, we'll become the leading global provider of integrated payment technology solutions, a key area of emphasis at our investor conference, with approximately $650 million of annual net revenue. .

Our integrated businesses are quite complementary. For example, Heartland Commerce has a market leadership position in the restaurant and hospitality verticals, not an area of significant historical presence for our OpenEdge business.

Also, Heartland's School and Campus Solutions are expected to enhance our presence in a number of universities in the United States and globally, while also providing us with a leading position in the K-12 market. Heartland's ability to deliver Software-as-a-Service also opens additional avenues for business model enhancement over time. .

We believe that the combined company will have one of the highest rates of organic growth in our industry with technology-enabled distribution net revenue of $1.1 billion annually.

In addition, the transaction will meaningfully shift the mix of our revenue toward the United States, our largest market and one of the most dynamic payments markets worldwide. Of course, the combination will further accelerate the trend toward direct distribution, which we have been emphasizing over the last several years. .

Now I'd like to hand the call to Cameron. .

Thank you, Jeff and Bob. And good afternoon, everyone. We very much appreciate you joining us to discuss this significant transaction for Global Payments. .

As Jeff noted, we entered into a definitive agreement to acquire Heartland for $4.3 billion, including the assumption of approximately $500 million of Heartland net debt.

Consideration for the transaction will consist of 0.6687 shares of Global Payments stock and $53.28 for each share of Heartland stock at closing, subject to the terms of the merger agreement. .

Existing Global Payments shareholders will own approximately 84% of the combined entity. The cash portion of the consideration will be funded with fully committed debt financing. .

Upon closing, the pro forma business will have approximately 157 million shares outstanding and approximately $4.4 billion of debt. Pro forma leverage for the combined company at closing is expected to be approximately 4.4x on a debt-to-EBITDA basis. .

Importantly, given the strong cash flow generation profile of the pro forma business, we expect to return to our target leverage ratio within approximately 18 months. In the intervening period, we will retain ample capacity to continue our balanced capital allocation strategy. .

We anticipate mid-single digit accretion on a percentage basis from the transaction in fiscal 2017 and double-digit accretion thereafter. Our expectations for accretion assume the cost synergy estimates that we have highlighted but do not reflect anticipated revenue synergies that we have described. .

We're particularly excited about the growth characteristics of the combined company and the implications to our cycle guidance. As you will recall, at the beginning of this fiscal year, we raised our cycle guidance for the next 3 to 5-year period.

At that time, we indicated that we expect to drive mid- to high single-digit organic net revenue growth, expand margins by up to 50 basis points annually and grow cash earnings per share in the low double-digit to mid-teen range over the cycle. .

As a result of this transaction, on a pro forma basis, we now expect adjusted net revenue to grow in the high single-digit range on an organic basis as we are combining 2 of the fastest organic revenue growth companies in the industry. .

Further, while operating margins will be reset to a slightly lower base in the near term as we comport Heartland's presentation to our convention, we expect to be able to accelerate operating margin expansion up to 75 basis points annually. Importantly, we remain committed to our longer term goal of operating margins in the low 30% range. .

Lastly, we now expect to be able to grow cash earnings per share annually at a mid-teen pace over the cycle. The combination of Global Payments and Heartland presents a tremendous value creation opportunity through the realization of both substantial revenue and cost synergies.

Jeff and Bob already addressed the expected revenue synergies from merging these 2 businesses, so I will not repeat those.

I will, however, note that we expect these revenues and synergies to add 1% to 2% to the pro forma company's annual growth rate over time and that these opportunities are not reflected in the accretion estimates that we have provided for the transaction. .

In addition to the opportunity we see to accelerate organic rates of growth, we also anticipate that the merger will allow for the realization of significant cost savings. We expect to leverage Global Payments' leading worldwide, scalable platform and combine the best of each company's technology and operating environments to drive cost synergies. .

Consistent with our current strategy, we will also look to combine our workforces under our unified operating model. This integration will optimize our cost structure and position the company for strong growth while continuing to provide best-in-class customer service worldwide. .

We currently estimate that we will generate at least $50 million of cost synergies in fiscal 2017, building to approximately $125 million annually over time. .

Before turning the call back to Jeff, I would like to briefly comment on Global Payments' fiscal 2016 second quarter results and our raised outlook for fiscal 2016. We are delighted to report another solid quarter despite the continued impact of strong foreign currency translation headwinds across a number of our markets. .

For the quarter, net revenue growth was 5% or 12% on a constant currency basis and reporting cash operating margins were 29.6%. On a constant currency basis, operating margins expanded 60 basis points year-over-year. .

Cash earnings per share increased to $0.76, reflecting growth of 15% over fiscal 2015 or 29% on our constant currency basis. .

It is worth noting that we absorbed an additional $0.01 to $0.02 of negative foreign currency impacts into cash earnings per share and roughly $5 million into revenue in the second quarter relative to our expectations as of our last call in October. .

Turning now to guidance. We are again raising our fiscal 2016 outlook, notwithstanding our expectation that we will face incremental negative foreign currency translation impacts relative to our previous outlook. We continue to expect our fiscal '16 net revenue to grow 6% to 8% from fiscal '15 and range from $2.06 billion to $2.10 billion.

But for the impact of currency, we would have expected to trend towards the higher end of our guidance range. It is worth noting that this revenue growth rate is 10% to 12% on a constant currency basis. We are again increasing our cash earnings per share and operating margin expectations for the full year.

Cash earnings per share are now expected to grow 15% to 19% over fiscal 2015 and range from $2.90 to $3.00. We also now believe cash operating margins will expand by as much as 60 basis points in fiscal 2016 on a constant currency basis. Naturally, this fiscal 2016 guidance does not reflect any impact from the acquisition of Heartland. .

I will now turn the call back over to Jeff. .

Thanks, Cameron, and thanks, Bob. Global Payments has demonstrated through our strategic investments that we have been able to create substantial value for our employees, customers, partners and shareholders.

We view the combination with Heartland Payments as the next logical extension of our model to accelerate transformative growth as we create the leading payment technology company globally. We look forward to closing the deal in the fourth quarter of our fiscal 2016. Bob, Cameron and David and I are all happy to take your questions.

Jane?.

Before we begin the question-and-answer session, [Operator Instructions]. Thank you. And operator, we will now go to questions. .

[Operator Instructions] Our first question comes from the line of Andrew Jeffrey of SunTrust. .

Congratulations to all. I would agree it's a watershed event in the industry. I wonder if we could just get a little bit of background. I think having followed Global and Heartland for a long time, one of the stumbling blocks perhaps historically to a deal like this would have been the very different cultures and go-to-market strategies.

And I'm just wondering what's changed in that view? Is it the fact that Heartland has demonstrated that its sales force has become that much more productive? Is it the change in the technology-enabled distribution strategy? I just wonder if we can get a sense as to kind of what might have bridged at least, historically might have been perceived cultural issues or impediments from a deal like this.

.

That's a great Andrew. It's Jeff. I'll start and I'll ask Bob and David to comment as well. I would say, as I said in our prepared remarks, I would view this as a very natural extension of what we've been doing with APT and PayPros and, of course, OpenEdge.

And I would say as we look at the business as I described in the remarks, we've thought about Heartland Commerce. We've thought about their Software-as-a-Service business in the case of the school and educational market as very complementary to markets that we're not in directly but we think are very much adjacent to what we're doing today.

I would also say as we have broadened the nature of the business, and you know Andrew, we haven't really focused on direct distribution, as we discussed in our investor conference. It's hard, in my opinion, to find a better example of a well-run, go-to-market direct distribution than what Heartland has done over a period of many years.

So I think from our point of view, as we thought about where we have dealt with over the last number of years, where we'd like to be as a company, where we'd like to take our ability to control our interactions with our merchant base, for us, it was really not that much of a question that Heartland will be a great potential partner.

And speaking for us, I think that's how we thought about the announcement.

Bob, do you want to?.

Yes. Andrew, thank you for all your support over the last 15 years. You've been there every time, and I'll miss talking to you. I think there are several things going on here. Back in the beginning, we were an ISO, and I used to write for Paul Green's Green Sheet a lot. And we started -- when Heartland Payments was formed, we were an ISO processor.

And we decided early on that we couldn't manage the people, the ISO folks because they didn't really know who is selling for them. But the ISO model got very dominant, and then with the integrated space going -- the dealers became more and more part of the landscape. And most significantly is our business model -- our model began to work big time.

And when we broke through $10 million of installed margin for the first time a few months ago, that sort of was the deciding factor. This is the sustainable model in the industry for sales.

And we've been able to incorporate the dealer communities with our ISV purchases and demonstrate that we not only have a direct sales force but we have these dealer partners around the country. And Global's model, their model is virtually identical to that in terms of the dealers and the ISVs.

So I think the industry has changed in such a way that you're getting the best of both worlds combined into one sales model right now. .

Yes, I think I would echo from a go-to-market perspective -- and this is David by the way -- exactly what Bob said. As we've looked at the 2 businesses, we've been struck by the lack of overlap in the businesses themselves as they go to market from a distribution perspective.

But the absolute symmetry and like cultures, believe it or not, as they go to market strategy matter. So we're both focused on direct distribution.

We're both focused on technologies enabling payments and simplifying the process of a small to medium-sized business person running his or her business, operating that business, so applying technology to payments.

So when we think about going to market, to be really clear as a cultural matter, we're really very similar when we think about going to market and applying technology to payments. And to be even more specific, as we go forward, the segments of Heartland will continue to go to market as they do today.

And may be more specifically for what I would call the most visible part of Heartland, historically, the core agent sales shown that drives so much of Heartland's growth, we absolutely plan to maintain the levers that created this unique sales culture and engine, the brand, the Merchant Bill of Rights, the Sales Professional Bill of Rights and the sales team tools that this remarkable team Bob has built go-to-market with.

.

And our next question comes from the line of Georg Mihalos of Cowen and Company. .

I guess just to follow up on the prior question.

As you look at the different lines of business within Heartland, are there any that you would sort of view as non-strategic to the forward model of the combined entity? And how quickly do you think you're going to be able to take some of those products and services and push them over in some of the international markets?.

This is David again. Georg, a great question. Through our diligence and our work with Bob and his team, we have not identified any assets that we don't think are ripe for opportunities for growth going forward. So if you think about that for a moment, you mentioned global.

We have global applicability and opportunity for all of the technology assets that Heartland has acquired and built over time. More specifically, we spoke with you at the investor conference for Global Payments about taking OpenEdge, our integrated payments business, abroad and accelerating growth as it pursues its verticals around the world.

When you look at the verticals in which Heartland is strong, we have hospitality, restaurant, quick service, fine dining as well as education. Those are the verticals that OpenEdge does not pursue today, whether the United States or abroad.

We think we can quickly move to focus in the United States on dining -- on fine dining, excuse me, on quick service, and on the rest of hospitality in the United States, with the combination of dealers, ISVs and our unique OpenEdge ecosystem, our purpose-built ecosystem of marketing campaign management, lead management and integration management.

We'll go right after those verticals in the States. And then give us a little bit of time to take those other assets abroad. As we told you, we expect to accelerate growth by 1 to 2 percentage points over time.

I think it'll be sooner than you might have imagined in your models when we think about the international opportunities to globalize or to expand, particularly the higher education, the Campus Solutions, some of the School Solutions and the core point-of-sale software and hardware technology for hospitality. .

Okay, that's helpful. And just as a quick follow-up, maybe a question here for Cameron.

The $50 million in synergies for, I guess, fiscal '17 that you're talking about, will that be sort of average for the year or is that the level of synergies you expect to end the year at from a cost takeout standpoint?.

No, I think -- that's a good question, George. Thanks for that. I think the right way to think about it is that's the level of expense we would expect to be able to eliminate in fiscal '17. It's not the end of fiscal '17 run rate number. So we believe we would save $50 million of cost.

Or remove them from the expense line in fiscal '17, that number growing, as I mentioned before, to $125 million thereafter on a full run rate basis. .

And our next question comes from the line of Steven Kwok of KBW. .

In terms of the leverage ratio, it's 4.4x at the end of the deal.

I was just wondering, can you talk about how much of free cash flow you expect to generate and how fast you can delever over time?.

Yes, so it's really a good question -- Steven, this is Cameron. I'll address that. So we are on a pro forma basis, at close, leverage of roughly 4.4x. As I mentioned in my prepared remarks, we expect to get back to our target leverage ratio, which we've talked about historically being anywhere in that 2.5x to 3.5x range within an 18-month time frame.

So this pro forma business is going to generate more than $550 million of free cash flow annually, so the deleveraging profile of this business is one of the most attractive elements, frankly, of the structure we put in place to capitalize the business going forward.

And the beauty of how we structured it is obviously our ability to continue to execute on our strategic capital allocation plans going forward, while delevering the business over a very quick period of time. .

And then in terms of, does this deal then preclude you from deal -- from doing other deals going forward given the high leverage ratio?.

Steven, it's Cameron again. No, I would say the short answer is it does not. We've maintained ample capacity to continue our capital allocation strategy that we talked about before. Naturally, this is a large transaction. It's the largest we've done in our history.

We'll be very focused on executing well integration, realizing the revenue and expense synergies that we have highlighted today.

But certainly, as we continue to grow and expand our business globally, we'll look to pursue those opportunities, expansion opportunities, M&A opportunities that we think have the capability of augmenting our strategy and helping us to grow the business. .

Steven, it's Jeff. I would just say that we continue to be very active in our discussions in Europe and Asia. Of course, I think Bob has us covered here from the time being in the United States. But as it relates to Europe and Asia, I would expect us to continue the same playbook that we've been working off of over the last number of years. .

And our next question comes from the line of Kevin McVeigh of Macquarie. .

Let me add my congratulations as well.

Cameron or Jeff, can you help us understand the nice step-up in terms of the synergies from $50 million to $125 million? And in what bucket what those incremental savings are?.

Sure, I can give you a high level sort of, I think, preview and we'll obviously provide more detail as the time progresses in terms of where we expect to realize synergies from and how we expect to realize synergies.

But if you think about the 2 businesses, and we talked a bit about this in our prepared comments, these businesses are obviously heavily dependent upon technology and operating environments to continue to grow and expand the business and deliver the type of service we both collectively want to be able to provide our customers here in the U.S.

and around the world. So as we look to the 2 businesses, we clearly see opportunities to create synergies in the area of technologies and operations as we combine the best of both companies and really look to drive a highly leveraged, both highly scalable technological and operating environment going forward.

And naturally, in any public company transactions of this nature, there's a lot of overlap in third-party expenses and external costs associated with being public companies that we'll be able to eliminate as well.

So in the area of general and administrative expenses, naturally you would assume in a company the transaction of this nature that we'll be able to realize synergies there as well.

But we're focused on obviously creating value through realizing revenue and expense synergies, but it's more about combining the best aspects of each of our 2 companies in a manner that's going to create a preeminent payment company worldwide going forward. .

Got it. And then, only one question.

But can you just help us with the tax rate of the combined entity?.

Sure. I'll give you a little bit of a guide, and we'll obviously be able to provide a little more color on that going forward. Given that Heartland Payments is a purely U.S. business at this stage, their effective tax rate is a little bit higher than ours, so it's roughly 38%, 39%.

So on a pro forma basis, I would expect the combined entity to have an effective tax rate of around 30, 29 to 30 in that ballpark. Naturally, we'll continue to look to strive to find ways to minimize the effective tax rate for the pro forma business, and we're in the process of already thinking through strategies that would allow us to do that.

But given the nature of the business that we're acquiring, it will raise the overall effective tax rate for the pro forma business. But naturally, that's all reflected in the economics we provided today. .

And our next question comes from the line of Paul Condra of Crédit Suisse. .

I had a follow-up on the $125 million as well.

So is that where you expect to be by 2018? Or is that how where you expect to get at some point in the future? Any more clarity there? And then would you call that a conservative forecast or how did you get to that number? What's your thinking about that?.

It's a good question. Paul, it's Cameron. I'll jump in again. Again, our expectation is we'll realize $50 million of those synergies in fiscal '17 and we expect by the time we get to fiscal 2018, we'll be at the $125 million run rate number. The way I would characterize this estimate obviously, we spent a lot of time with Bob and his team.

I think we have a good handle as to where the opportunities are as we look again to combine the best of both companies and we're highly focused on delivering on a number that we're providing you today. I think we have a good track record as a management team in delivering on the commitment that we make to The Street. .

Paul, it's Jeff. I will just add to that, that if you look at Bob's company and our company more generally, one of the other things that I think is very attractive about this partnership is that both companies are operating very well and are coming out of this at a position of strength.

So we really feel this is the right time to combine 2 of the fastest organic revenue growth rate companies, both of which are really, on their own, firing in all cylinders. And we said in our prepared remarks, we think we can do a lot more together than we can do separately. .

And our next question comes from the line of Bryan Keane of Deutsche Bank. .

I jumped on a little bit late, so I don't know if talked about this Jeff. But how long have you guys been talking about a potential deal here? Because I didn't get the sense at the Analyst Day that something of a big size was really in the works. So I'm a little bit surprised to see the magnitude or the size of the transaction.

And then secondly, what -- and then just secondly, just financial metrics you guys used to value Heartland Payments, would be great. .

Sure. I'll start and Cameron can comment on financial metrics, Bryan. Well, first, I think we've got good poker faces, maybe that's one way to answer your first question. But no, look, I've known Bob for 15 years, at least 15 years. I would say that I called Bob a couple of months ago to talk about whether this may make sense.

But it's really born of a long relationship that we've had with Bob and Heartland, and a lot of respect for the company. And I think I would probably leave it at that.

Cameron, you want to talk about the second question?.

Sure, I'll be happy to. Bryan, I would say, this deal is no different than any other deal that we look at. I think we've been very clear in our history in terms of how we think about valuing and value creation associated with our M&A activities.

This transaction, we looked at, certainly, from a cash earnings per share accretion point of view, and we looked at it largely from an IRR point of view to determine, is this the best use of our capital relative to the alternative uses of that capital.

And needless to say, I think when we ran the math and we looked at the economics and the value creation and more importantly, strategically, what we can do together as a business, I think we're very confident that there is meaningful value-creation opportunities here.

The IRR from this transaction is very powerful relative to the alternative uses of capital and the multiples are, I think, attractive, all-in, particularly in light of the synergies that we expect to be able to realize both from a revenue and expense point of view. .

Okay. And just a quick follow-up. Is there an base number, EPS number, that we should use to get to the accretion against? Because it's a little bit difficult, the moving pieces to get to the mid-single-digit accretion in the first year given the higher move in the tax rate. I just want to make sure I got my numbers correct. .

Bryan, I would guide you to The Street number for now. I don't think that's a poor estimate to start with. I think we're fairly transparent in terms of the sizable guidance that we had outstanding and what we think we can achieve as a business, so I think The Street estimates are a good place to start. .

And our next question comes from the line of Jason Kupferberg of Jefferies & Company. .

Just wanted to see if you can talk a little about the valuation multiple here. I guess we're upwards of 30x next year as Heartland's earnings.

And just wanted to get a sense, like, in that context, is there any competitive nature to this deal? I know Jeff, you just gave a little bit of background and it sounds like this all came together relatively quickly, but was there any competitive element here? Or was this kind of a self-sourced conversation? And is there any breakup pay?.

So I would just say, Jason, that as I said to Bryan, I reached out to Bob and I'll just leave it at that -- I'll leave it at that for now. In terms of the multiples, as Cameron was alluding to, we think this was done on a multiple basis that was consistent with both the APT and PayPros.

As it relates to revenue and EBITDA, before we factor in the synergies and then after the synergies, compares very favorably, as Cameron just mentioned, given the size of the opportunity relative to the size of the EBITDA of Heartland.

So as we look at it, we feel pretty good about how this stacks up competitively with the deals that we have done and the deals that have been done in the marketplace. .

Okay. And then just in terms of the respective sales force. I know you talked about keeping the compensation model intact for Heartland.

What else is being done to make sure that you retain, especially the best Heartland salespeople, and then will there be any change in the comp structure for GPN's direct sales force in the U.S.?.

Yes. Jason, David here. Again, I would point you back to the opening comments when Jeff, Bob and I we're talking about the go-to-market and the cultures. The beauty of the transaction from our perspective, and it became increasingly apparent the more work we did, was the lack of overlap across these channels.

If you look around our channels in the United States, we obviously have our OpenEdge business, we discussed that earlier, that's our integrated payments business with no overlap really whatsoever in terms of the verticals pursued by the technology enabled businesses that Heartland has.

More specifically, just to be really clear about that one, less than 5% of our OpenEdge volume comes from the combined verticals that Heartland serves so well, hospitality, quick service restaurant, fine dining, dining, education. So really, terrific opportunity actually to add and make 1 and 1 equals 3 between those technology enabled businesses.

When you look at the agent sales force, we want to retain that culture, the unique nature of it.

We're absolutely convinced that, that's what drives the growth you see so impressively in Heartland's results, particularly in the last 2, 3 years, it's been an amazing progress that Bob has talked about in our call, as well, the last call he had at Heartland Payment.

If you look around the rest of our United States channels, we don't intend to fundamentally change anything. We have ISO partners, where we're still a core part of one of our channels. They are not obviously our sole strategy going forward, as you've known and watched us execute the last 3 years or so.

But for our ISO partners, the competitive dynamic of this industry don't change at all. So I think solid news for them. And the more tools we absorb from the combined companies, for example, boarding from Heartland Payment, those tools will be made available to our ISO partners.

When you look at our direct sales channels in the United States, there, we have sales folks who work with the discrete bank partners. We tend to operate a little upmarket of the core Heartland market, and so those folks are in very good shape going forward as well.

Again, more tools and products for those folks to sell, just as we'll provide more tools and products to the Heartland sales professionals to be able to sell from the combined companies.

So to use the phrase Cameron used earlier, when we combine the best of both of these businesses, we have real opportunities in every channel we serve in the United States without creating messy channel conflict that you might be worried about on that question. .

And our next question comes from the line of David Togut of Evercore. .

This is Mike Landau in for David Togut.

First, I was wondering if you could provide a bit more of a time line for when you expect to combine the platforms for both businesses?.

It's Cameron, Mike. I would say it's a little early, perhaps premature, to get out in front of the exact plans that we have for combining platforms and how, as I described, this has been mentioned a couple of times today, how we intend to get the best of both businesses and combine that into the combined business that we'll operate going forward.

So I think as we looked at the synergy estimates that we provided, I think that gives you a good time frame and an overall sense as how we would expect to realize synergies over the course of time. Without getting more specific than that, I think that's probably the best overview we can give today. .

And our next question comes from the line of Wayne Johnson from Raymond James. .

So on the channel question -- sales channel question, will you maintain -- will Global Payments maintain a separate and current commission structure versus what Heartland is being paid? Is there any consideration to change Global to look more like Heartland? Or will they be operated completely separately?.

So this is Bob. I'll jump in on that one. The Heartland model is going to thrive, I believe, under Global for a couple of reasons. One is that we have a lot of salespeople who come from other countries. And I think they're going to be able to add a lot -- a whole new dimension here that doesn't exist in the industry.

For years, people have been saying, "I should go back to my home country and represent Heartland." And we're like, "Well, yes, you've got to wait for that." It's never happened. So I think that's a huge opportunity.

Our portfolio of equity model seems to be unique in the industry and it's something, as long as that's kept, I think that our salespeople are going to stay in place under the leadership of some really exceptional leaders. Tony Capucille, started off with us right out of college as a rep, and he now runs the entire organization of 1,400 people.

He has Vince and Jason under him that was the same thing. They have tremendous credibility with the regional managers, the division managers, the RMs. So I think our -- I think we hit a great stride and in turn, be able to take the existing organization of Heartland much further, is we have not penetrated all parts of the country in an effective way.

And I'll let David speak to the issue of how that's going to impact with your direct people. .

Yes, I couldn't put it all better, thank you Bob for that. I would say almost to mirror what Bob said. The unique opportunity to take the model abroad, particularly in places where maybe we're still building our direct sales presence. So Brazil, in places like that where we have a unique opportunity to really hit the ground running with the model.

In terms of global, we'll go and look at the combined channels channel-by-channel and figure out the best solution. But I'm going to say again what I said at the very beginning of the call, we intend to operate that core agent channel the same way that Tony and Bob have operated it. That unique culture is what drives the growth.

The question is whether that can be exported, Bob correctly pointed out, abroad, to places where that same equity approach fits. We'd be fairly foolish not to learn from that and apply it wherever it fits anywhere else around the world or on any of our other markets or channels. So look for us, though, to continue to leverage.

What's really exciting about this deal, Wayne, which is no channel overlap or very minimal channel overlap as we go all around the United States, unique opportunity, traditional cross sales of the value-added products in Heartland to Global's direct -- existing direct channels.

Unique opportunity that frankly, no one else in the world has to globalize the product sets in education, hospitality, that Heartland brings to market and potentially globalize the equity comp scheme where it applies in markets around the world. .

I appreciate the answer. It sounds like an exciting combination.

On a technology front, so just to be abundantly clear, you guys intend to operate 2 separate platforms then on the technology side, with electronic bridges where necessary, so to speak?.

Wayne, it's Jeff. I'll just point back to what Cameron said a minute ago. I think we're going to combine the best of both of our companies worldwide at Global Payments. As an aside, worldwide, as you know, we operate a unified technology and operating culture.

So I think as we make progress with our partners at Heartland, we will figure out what the right best of both companies really is from a go-to-market technology point of view. But until then, we can't really say what the ultimate outcome is going to be. So bear with us.

I think we've got a good track record of executing on new partnerships globally, and I think we and Heartland will be very pleased by the outcome. .

And our next question comes from the line of Dan Perlin of RBC Capital Markets. .

Just a couple of quick ones. The -- when I'm looking at these calendarized numbers for both you guys and Heartland, it looks like your jumping-off point for adjusted EBITDA is kind of in the 32%, 33% range for yourselves and then Heartland's around 27.5%, maybe 28%. With synergies, it looks like you get back to that on a pro forma basis in '16.

So -- and that gets me to the $1 billion that you guys are talking about.

I guess, point one, is that the right jumping-off point for us to start with? And then two, I just want to make sure, total consideration, looks like 53% of this is going to be financed with debt, what's the fund cost associated with that? And then the remaining part is just all stock. .

Yes, so Dan, it's Cameron. On the first point, I think your math is generally correct. As you're thinking about EBITDA multiples, however, I would caution you, our net revenue convention and Heartland existing net revenue convention, ours is slightly divergent. We will look to obviously, morph that over time.

The numbers we quoted in our release and also today that's roughly $3 billion of net revenue and greater than $1 billion of EBITDA going forward are based on our convention, which we would expect to adopt, obviously, going forward.

As it relates to the financing of the transaction, our intent, as we sit here today, is to continue to utilize our existing Term Loan A and credit facilities that we just redid this past summer to amend and extend those facilities and then raise a new term loan to support the execution of the transactions.

So we'll -- there'll be new debt requirements of roughly $2.6 billion to fund the transaction, and that includes refinancing Heartland's existing debt. And the price of that is going to be obviously, market-based pricing for a leverage profile of this type business.

So I would say for purposes of modeling, if you're trying to get a bit of a head start, I would average something in roughly the 4% range is probably a good starting point, 4%, 4.25%, on a blended basis for the different tranches of debt that we'll have in place to finance the transaction. .

And our next question comes from the line of Jason Deleeuw of Piper Jaffray. .

The question I have is on the revenue synergies, U.S. versus international. It sounds like a lot of us expected international.

Is that the case in how you're thinking about the revenue synergies?.

Jason, we actually think about almost right down the middle.

But I think the international opportunities are really, really substantial across our 29 markets and as Bob said, international sales folks as well as international product that already exists in some of the point-of-sale, SaaS businesses, but don't undersell the opportunities in the United States for additional cross sells of various value-added products, whether it's the gift and loyalties and the payroll.

And we think we really can create something powerful between OpenEdge and the hospitality dealer and SaaS businesses that Bob runs in Heartland Commerce. So big numbers. The way we conceptualize this is roughly half-and-half for now. The sequencing may be a little bit different, there's more we can do in the United States more quickly than abroad.

And remember, these are targets we expect to achieve over a little bit period of time. .

Great. And then on the integrated point-of-sale channel in the U.S., Heartland has had a little different strategy from some other players. They've owned -- they've acquired point-of-sale software. I guess, how are you guys thinking about that channel in the go-to-market approach.

Do you see any changes? Or is it just simply a continuation of that strategy?.

I think -- great question. I think what you'll see is the continuation of that strategy.

When we were at the Investor Day with you folks a few weeks ago, we talked about extending OpenEdge globally, extending omni capabilities globally as 2 areas of growth, but we also talked quite specifically about going deeper into the technology sets, the software, the integrated hardware, that works with the payments that helps small to medium-sized business on particularly, but also larger enterprises run their businesses.

That's a sort of a quick way I might summarize what the Heartland team has done with Heartland Commerce, looking at point-of-sale hardware, software, perhaps more akin to a SaaS model, married to the payment and helping business persons run their business. So we're going to continue that strategy.

We may tweak the distribution and augment it by pairing it more with OpenEdge and going square at dining and hospitality with our OpenEdge models.

So we're also going to continue the direct strategy just as we have with some of our other businesses like our gaming acquisitions from several months ago, deep marriage of our payments and technology, the technology that runs casinos, just as we'll do with small to medium-sized merchants, really, around the world over time. .

And our next question comes from the line of Craig Maurer of Autonomous Research. .

A couple of questions.

First, are there any assumptions being made in the guidance related to pricing, considering Heartland's had over time an interchange pass-through type structure? And secondly, when looking out to future guidance, just wondering how much of that is related to or what you're expecting will be the contribution from the European regulatory changes? And if those changes provide any unique opportunity as relates to this deal?.

Craig, it's David. I'll start and turn it over to Cameron, really just to answer your first question from a pure business perspective. I point back to what we've described a couple of different times.

Our intention is to continue to run the Heartland business model, that agent sales channel with the way it operates, the way it markets and sells products, the unique culture around Merchant Bill of Rights, the sales professional Bill of Rights, we intend to continue.

Cameron?.

Yes. So I think that's a business way of saying, no, we don't have any -- changes in place as it relates to pricing.

When we look at the opportunities to create value from the transaction, it's really about leveraging, again, the best of both companies, Heartland's well-established certainly fantastic sales culture, sales performance, new store sale installations and new installed margin growth and combining that with the best of what we have in the U.S.

market as well. So again, the accretion assumptions that we have given today assume, again, no revenue synergies, but certainly not any pricing changes as well. To your second question as it relates to the European market, I think we said for quite some time, we view Europe as a very attractive market.

And there's aspects of what we talked about today that David, I think, has described very well, where we see great opportunities to leverage, certainly, some of the technology and product and solutions -- payment solutions that Heartland has today into our European business.

I think education is a good example of where we see a fantastic marriage of Heartland's technology and our existing presence in the education vertical, particularly in the U.K.

market for example or other markets in Europe, where we see a great potential to marry that technology with our existing presence to drive incremental value and revenue synergies for the business. As the EU market evolves, barriers between different EU countries go down.

Certainly the ability to leverage that across a broader EU footprint is in, I think, part of the blueprint. But certainly that is something that we would expect to materialize over time. .

And our final question comes from the line of Jim Schneider of Goldman Sachs. .

Just one question related to the geographical distribution of Heartland in the U.S. There's clearly some concentration historically that you've had within the U.S.

It sounds like your bigger priority or more immediate priority is expansion of Heartland's model internationally, but can you maybe talk about where there's some additional regional, if it still makes sense, within the combined umbrella of both companies?.

Yes, this is David, Jim, interesting question. I think that as we've worked with the sales team, and Bob mentioned Tony leads the sales team, there are opportunities for a broader geographic penetration, in some cases, different market penetration within that sales model. We do intend to pursue those strategies.

I don't know that I'm going to talk about them in detail on this call tonight, but you do raise a very good point. Where there is white space, one of the things that was attractive to us in diligence is where there is white space, there is plan to go attack the white space. We do intend to follow that strategy.

And again, where applicable, take the model, and not just this model, the model for the point-of-sale, the model for the other business units, education, Cameron mentioned a moment ago, more accelerate their international growth where applicable in the 29 markets we serve directly around the world. .

And then as a similar related question, can you maybe just talk about the opportunity to extend the reach into additional verticals that Heartland isn't servicing today within the U.S., and what this might be?.

Yes, I'd be happy to. I think there are 25 to OpenEdge and ultimately, we've discussed with you guys in the Investor Day in terms of greater penetrations in specific verticals. We are a leader in over 60 verticals by the OpenEdge business, that is a business that's driving enormous amount of growth for us in the United States.

We can complement that with the hospitality verticals I described earlier, as well as the education verticals and we very much like the idea of going deeper into specific verticals, but we're not competing with our partners.

Do more the technology stacking, get closer to customers to help them run their businesses, that's what Heartland has done with education, and increasingly, their strategy around the point of sale is similar to ours, owning the software to drive the interaction with consumer at that point-of-sale is a great place to be when you're looking at payments that are going to expand your franchise and accelerate growth over time.

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On behalf of Global Payments and Heartland Payment, thank you very much for joining us this evening. .

Ladies and gentlemen, thank you for your participation. This does conclude our program. You may all disconnect. Everyone, have a great day..