KKR just took another big step in its years-long exit of First Data, the payments company it acquired for $26 billion 11 years ago.
Financial technology giant Fiserv announced on Jan. 16 that it agreed to buy the Atlanta payments processor for $22 billion. Once the transaction closes, Fiserv will own 57.5 percent of the combined company, while First Data will own 42.5 percent. The combination is expected to create at least $500 million of revenue savings over five years.
The merged company will be known as Fiserv. Jeffery Yabuki, current Fiserv president and CEO, will become CEO and chairman of the combined company. Frank Bisignano, First Data’s chairman and CEO, will serve as president and COO of the new entity.
News of the deal caused First Data shares to jump 21.09 percent to close at $21.24 on Jan. 16, while Fiserv’s stock lost 3.29 percent, closing at $72.57 per share.
KKR will continue as shareholder in the combined company. KKR acquired First Data in 2007 in one of the largest deals during the PE boom of 2005 to 2007. It was also an albatross for KKR for much of its holding until First Data became profitable in 2015, the same year it went public.
Since the IPO, KKR has been selling off chunks of First Data in secondary offerings. The buyout shop, however, is not offloading any shares with the Fiserv transaction. KKR currently owns 39 percent of First Data and has 86 percent of the voting rights. Following the sale, it will own 16 percent of the combined company.
The deal is a merger of two huge fintechs. First Data is a leading merchant acquirer that employs more than 22,000 people. It processes 93 billion transactions annually for more than 4,000 financial institutions. First Data has been acquisitive, buying Clover in 2013, as well as CardConnect and BluePay in 2017.
Fiserv, based in Brookfield, Wisconsin, provides systems and services, like electronic bill payment and business process outsourcing, to financial institutions like banks and credit unions. More than one in three U.S. financial institutions use Fiserv’s services. It moves more than $75 trillion annually. The company employs 24,000 associates globally. Fiserv scooped up Elan Financial Services in September.
The combination of Fiserv-First Data is expected to generate about $900 million of run-rate cost savings over five years, mainly from cutting duplicate corporate structures, operational efficiencies and process improvements, a statement said. In addition, Fiserv said it plans to refinance the roughly $17 billion in debt that First Data has accumulated, mainly from its sale to KKR over a decade ago.
“This is very good for KKR,” one banker said. “I’m not so sure about everyone else. It’s definitely a low multiple and a low share price relative to where they stood only a few months ago. [First Data] is a very slow growth company so I wouldn’t expect a high multiple, but this is still low for a takeout.”
First Data is selling for 13x Ebitda while Fiserv is trading at 17x Ebitda, according to one general partner, who noted that 17x is high for a company growing by 4 to 5 percent. Including the $900 million in cost synergies, the multiple drops to 10x, the exec said.
First Data’s enterprise value is $39 billion, while Fiserv’s EV is $34 billion, the GP said. “The smaller Fiserv is using its higher multiple to do this and avoid too much dilution by taking on First Data’s $17 billion in debt,” the executive said.
Fiserv and First Data characterized the sale as the “biggest payments deal in history” in an analyst call announcing the transaction.
Bisignano, who is credited with turning around First Data, said he was highly focused on deleveraging the company’s balance sheet. “This transaction gets us there immediately,” he said on the call. “This was not a difficult decision to make at all to put the companies together.”
Yabuki was asked whether taking on First Data’s $17 billion in debt might restrict Fiserv from going after other acquisitions. Yabuki said he realized First Data “had lots of debt, but major investments were being made in the company at the same time… Frank [Bisignano] and his team were spending 99 percent of their time delivering excellence… We had the impression that this was a great, misunderstood asset.”
Fiserv is looking to “rapidly pay down the debt,” Yabuki said. “We will achieve a historical range of Ebitda and we will get there awfully quick.”
The deal could create opportunities for more nimble players. The merger of Fiserv-First Data creates a behemoth that is that “much less flexible and innovative,” the GP said. “This is good news for smaller, innovative companies and hopefully leads to some divestitures.”
First Data and Fiserv could not be reached for comment.
Action Item: For more information see the acquisition announcement: https://bit.ly/2CpJJxv.