LONDON - It’s wiser to be a seller than a buyer during M&A frenzies. The acquisition of Worldpay by Fidelity National Information Services (FIS) suggests the same rule holds for the rapidly-consolidating payments industry.
FIS – a $35 billion company whose longtime chairman and chief executive is Gary Norcross – sells software to banks and other financial institutions. On Monday it announced a cash-and-share deal which values Worldpay at $43 billion, including debt. The U.S.-listed target, formed after Vantiv bought the former payments arm of Royal Bank of Scotland and kept its name, sells software and hardware allowing merchants to accept credit and debit cards.
It’s the largest of about 36 major payments industry deals since the start of 2018, using a list compiled by Barclays. Consolidation makes sense since bigger groups can spread technology costs over more transactions, and offer more services to juice sales and stop clients switching to rivals. Norcross reckons he can wring $400 million of cost savings from the combined company after three years, and boost sales as well.
There are two hitches. First, FIS is essentially promising to integrate three companies rather than two. The merger of Vantiv and Worldpay only completed in January 2018, and realised cost synergies last year were about one-quarter of the $200 million a year those companies have promised. That implies there’s still plenty of integration to do.
Second, FIS is valuing Worldpay at 20 times its expected 2019 EBITDA, using Refinitiv estimates. That’s well above the median trading multiple of about 15 times for listed payments-processors, according to Barclays. It’s closer to the valuation of networks like Visa and Mastercard, which have less risky business models.
Generously assume Worldpay’s sales keep growing by 10 percent a year and its operating margin rises to 50 percent. Operating profit would reach $2.8 billion by 2022. Throw in FIS’ projected cost savings and tax at Worldpay’s 14 percent rate, and the buyer is getting a return on invested capital of just 6.5 percent.
To lift that figure nearer to 8 percent, Norcross would need to add $700 million to operating profit. At a 50 percent margin, that implies $1.4 billion of additional revenue – equivalent to one-third of Worldpay’s likely top line this year. Sellers seem to be getting the better end of the deal.
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- Fidelity National Information Services (FIS) on March 18 agreed to buy Worldpay in a cash-and-share deal valuing the payments processor’s equity at $35 billion.
- Worldpay shareholders will receive 0.9287 FIS shares and $11 in cash for each share. The deal implies an enterprise value of $43 billion, or 19.8 times the EBITDA analysts expect Worldpay to generate in 2019.
- FIS said it expected $400 million of annual cost savings in three years and $500 million of revenue synergies.
- Worldpay’s London-listed shares were up 11.3 percent to 82.5 pounds ($109) at 0900 GMT.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
(Editing by Peter Thal Larsen and Bob Cervi)
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