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FIS’ $43 billion Acquisition of Worldpay

By Carlos Asorey, Gustaf Baavhammar, Steven Skomra and Chris Leung (Georgetown and University of Warwick) - Date: 07/04/2019

Overview of the deal

  • Acquirer: FIS (Fidelity National Information Services)

  • Target: Worldpay Inc.

  • Estimated value: $43 bn

  • Announcement date: 18/03/2019

  • Acquirer Advisors: Centerview Partners and Goldman Sachs

  • Target Advisors: Credit Suisse

US financial services provider FIS has launched a $43bn bid on British payments processing rival Worldpay to create a fintech services juggernaut. The deal comes at a heated period in the financial technology sector which is consolidating with rapid intensity as global payments are expected to reach new heights of $3 trillion in annual revenues by 2023. Despite M&A activity in other sectors stalling over trade tensions, growth in the payments sector has been strong. Deal count and size in the financial services has foreseen an upward trend throughout the decade as exemplified by the fact that FIS’ acquisition comes only 2 months after Fiserv and First Data entered into their own $22 bn merger. Yet the impetus for such rapid consolidation has been largely driven by increasing pressure in recent years to slash costs, provide more innovative solutions, and expand their consumer base as more people migrate onto cashless platforms.

“Scale matters.” - FIS Chairman, President and CEO Gary Norcross

Company Details (FIS)

FIS is a global leader in the financial services technology industry, providing solutions and services to both retail and institutional clients. Having grown artificially through a series of acquisitions over the past 15 years, FIS offers a breadth of solutions portfolio, global capabilities and domain expertise, with their systems in use from back office automation to front office trading.

- Founded in 1968, headquartered in Florida, United States

- CEO: Gary Norcross

- Number of employees: 53000 (2017)

- Market Cap: $36.55 bn -EV: $44.81bn

- LTM Revenue: $8.42 bn -LTM EBITDA: $2.38 bn

- LTM EV/Revenue: 5.32x -LTM EV/EBITDA: 18.81x

Company Details (Worldpay)

Worldpay is a leading payments technology company that formed as a result of a recent acquisition by Vantiv earlier in January. Processing more than 40 billion annual tractions whilst supporting over 300 payment types across 126 currencies, Worldpay operates an integrated technology platform that generates revenues by collecting transactions fees coupled with data insights and consultancy services.

- Founded in 1989, headquartered in London, United Kingdom

- CEO: Charles Drucker

- Number of employees: 5000 (2017)

- Market Cap: $35.28 bn -EV: $42.09 bn

- LTM Revenue: $3.93 bn -LTM EBITDA: $1.55 bn

- LTM EV/Revenue: 10.72x -LTM EV/EBITDA: 27.2x

Projections and Assumptions

Short term consequences

Including debt (~$9bn) which FIS plans to refinance, the deal would value Worldpay at approximately $43bn ($112.12 per share) wherein Worldpay shareholders are set to receive 0.9287 of FIS shares and $11 in cash per share held, representing a mere 14% premium on Friday’s closing price. Whilst a low premium paid bodes well from FIS’ financial viewpoint, it may also reflect the slower growth prospects within Worldpay’s core market coupled alongside the need to trim costs – which will be where the majority of short term objectives lie. Following news of the acquisition, shares in Worldpay jumped 9.9% whilst FIS inched 0.7% lower. Despite experiencing a temporary minor dip, the deal would not only immediately accelerate organic revenue growth, which is projected to increase to between 6% - 9% through to 2021, but also streamline operations and facilitate long term value creation through opportunities across merchant and banking ecosystems.

Should the transaction be approved by regulatory bodies, Norcross will remain as chairman of Board of Directors, President and CEO of FIS, meanwhile Drucker will assume a new position as executive vice chairman of the combined firm. Homogenising operations over the short term would help reposition FIS to better capitalise on the booming e-commerce pay-tech industry, especially in emerging markets with a focus on Brazil and India – countries that bear large mobile presence yet still retain traditional cash methods. Furthermore, the acquisition has been branded as a “diversification play”, allowing FIS to expand into the high-growth payments sector where size and scale certainly provide an advantage. Deals such as PayPal’s $2.2 bn acquisition of iZettle or Fiserv’s $22 bn merger with First Data could potentially become the new norm for this rapidly consolidating industry where acquisitions are proving to be the most effective manner of coping with increased competition, as they consolidate the fragmented industry by predatorily acquiring companies to boost their market presence.

In addition, FIS anticipates $500m of revenue synergies, coupled alongside $4.5bn of expected future cash flows over the next 3 years – insinuating significant value creation for both companies and shareholders. Furthermore, integrating both teams would help leverage managerial expertise who have proven track records for innovative leadership and exceeding synergy targets to maintain exceptional value to clients and shareholders alike. Ultimately, the deal is expected to elicit a certain degree of short term merit, although much of the synergies would be manifested within the firm’s long term goals.

“This is all about an offensive deal and going to where the growth is happening and looking in the long term” – Gary Norcross, Worldpay CEO

Long term upsides

The acquisition of Worldpay comes at a time of increasing competition in the online payment industry as smaller, more technologically focused startups have started to challenge larger, more established companies. As a result, larger companies have turned to consolidation through mergers and acquisitions, takeovers, and private-equity buyouts as a way to increase scale and cut costs in order to more easily fend off against new competition in a highly diversified industry. This has been seen in Vantiv’s 2017 acquisition of Worldpay, Fiserv’s current merger with First Data, and now FIS’ acquisition of Worldpay. A combined entity of FIS and Worldpay would increase FIS’ position within the industry against these new competitors and other consolidating firms such as Fiserv, but FIS maintains that the acquisition is merely to generate future growth and is not a response to recent M&A activity.

FIS hopes that acquiring Worldpay will allow them to improve their current position in the U.S. market and also allow them to expand further into emerging markets. While FIS currently ranks only 126th in global transactions done for merchants, Worldpay is the world leader. By combining the two companies’ complementary services as well as allowing them to cross-sell services to each other’s clients, FIS will take on a greater global role. In addition to online payment technology services, the company will be able to offer additional services such as wealth management, fraud and risk management, and advanced data analytics. Additionally, given FIS’ current size, reaching smaller merchants in emerging markets has been a challenge despite significant relationships with banks in India, Brazil, and Southeast Asia. Moving forward, FIS plans to further expand into these markets as it becomes a larger global player.

Risks and Uncertainties

Given the current consolidation of the payment and fintech industries, there is significant uncertainty as to the future of small and mid-sized banks and card issuers. Many of these banks may fear reduced attention as companies such as FIS and Worldpay get larger. Some may begin to seek out smaller organizations that can provide a more hands-on approach to their needs. This could divert smaller market competition away from the combined entity of FIS and benefit the smaller start-up companies that they are trying to fend off against through increased scale. Additionally, there is some risk as to whether or not FIS will be able to integrate with Worldpay as easily as it predicts, or if the process will be more difficult, time-consuming, and expensive than anticipated. The two companies expect the deal to be completed in the second half of 2019, but issues may arise such as regulatory approval that may delay this process or make the integration process more difficult. FIS maintains that the cultural alignment of the two organizations as well as the companies’ history of successful acquisitions and integrations will allow the process to be fairly straightforward.

FIS also assumes roughly $8 billion of Worldpay’s debt in the transaction, putting the total value of the deal at $43 billion. While FIS is expected to refinance this debt, total long-term debt could be a risk to FIS moving into the future with $8.94 billion in its own debt. Some have also criticized FIS for paying too much for Worldpay and that the price is too steep. Vantiv is still yet to capitalize on total synergies from its acquisition of Worldpay, but the deal was too good for them to refuse. In order to capitalize on significant revenue growth long term, the company will have to be able to successfully integrate and capitalize on complementary services as well as be successful in moving into new markets and taking on a larger role in their present ones.

“The deal reinforces the transformational and disruptive impact that e-commerce is having on payments. In-store payments are very local and difficult to scale, whereas e-commerce has significant benefits to scale, and is very global." - Lisa Ellis, Moffett Nathanson
“Parking the two companies together gives the enlarged business a very strong position by which to play the structural growth in digital payments. They will be able to provide clients a wider portfolio of services. ” - Russ Mould, AJ Bell

© The MergerSight Group. 2018. All rights reserved.


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