Fintech Giant’s Bad Wedding Leads to Happy Divorce

By Breakingviews

Many mergers fail, but managers are rarely humble enough to admit it. At Fidelity National Information Services (FIS), a provider of software to banks, a new chief is needed to bring forward a shift. Appointed in December, CEO Stephanie Ferris’s first major move at the helm is to undo a $43 billion deal the company made four years ago when it bought payment processor Worldpay.

The uplifting shareholders DE Shaw and Jana Partners claim that the deal should not have been carried out in the first place. They have a point – FIS paid $3 billion more for Worldpay than the combined companies’ market value today. The shares have halved since the deal was concluded in July 2019.

Worldpay currently brings in around 30% of FIS’s revenue, mainly by serving small businesses and restaurants. These are worlds apart staid financial institutions that protect FIS’s core software business. The two parts of the company also have very different dynamics: 80% of FIS’s core business income is recurring, while payment income depends on transaction volumes and acquiring new customers through M&A. FIS’s payment-focused competitor Fiserv (FISV) is valued at 10 times expected EBITDA, while rival banking software giant Jack Henry & Associates (JKHY) is traded at an 18 times multiple.

These comparisons suggest that a split should unlock value. Worldpay’s performance is middling: Executives expect revenue from the payments division to shrink in 2023, while its core business will grow modestly. Suppose the separation reverses the $400 million in cost synergies that FIS promised when the deal was first announced. Then put Worldpay’s remaining estimated 2023 EBITDA, using Refinitiv forecasts, at a modest 9x multiple. As long as the remaining bank-focused business is valued at more than 11 times expected EBITDA, the combined enterprise value of the two separate companies will be higher than today.

The separation also gives both parties more opportunities. Worldpay can take on more than its share of the FIS debt. As a standalone company, the payments company can also borrow more to fuel future purchases without jeopardizing the former parent’s creditworthiness. And separating it through a spinoff to shareholders rather than an outright sale allows FIS to save on taxes in the short term while keeping the door open for a buyer to scoop up Worldpay down the road. Ferris inherited a bad marriage. The shareholders will hope for a happier divorce.

Contextual news

Banking software conglomerate Fidelity National Information Services said on February 13 that it will pursue a tax-free spinoff of Worldpay, the payment processing business it bought in 2019. FIS also announced a $17.6 billion write-down on the value of the business and lowered earnings expectations. for 2023. The company has been under pressure from activist investors DE Shaw and Jana Partners to explore strategic options, according to Reuters. It appointed Stephanie Ferris as CEO last December. FIS shares fell almost 14% on 13 February. On February 14, they traded at $67.7, up 2.5%.

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Editor’s Note: The summary points for this article were selected by the Seeking Alpha editors.