FIS - Fidelity National Information Services: Painful Roundtrip For Worldpay

2023-07-17 16:07:38 ET

Summary

• Fidelity National Information Services, Inc. has announced the sale of a majority stake in Worldpay, in a very expensive round-trip transaction.
• This is painful, as valuations have been reset a great deal already as leverage concerns abate.
• While the situation will be cloudy for a while, overall appeal might still be seen here.

Towards the end of March, I concluded that Fidelity National Information Services, Inc. ( FIS ) was paying the price for its 2019 acquisition of Worldpay. An expensive deal at the time, and subsequent disappointing performance of the acquired activities, created a very painful experience as management threw in the towel and decided to spin off the unit.

This would likely lock in a major loss, although that the valuation reset which has taken place along the way created some emerging appeal at the same time. With a deal being announced rather quickly, clarity is on the rise, even as the situation will be cloudy for some time.

A Quick Revision

When FIS announced a $43 billion deal for Worldpay in 2019, it was creating a giant in (e-commerce) payments and finance service technologies. While Worldpay was a bit smaller, it was the quicker pace of growth which should have driven compelling performance over time.

The idea was to offer a more comprehensive set of services outside payments, including loyalty programs, fraud detection and other merchant services. FIS was an $8.4 billion business based on its 2018 performance, posting fat EBITDA numbers of $3.1 billion, being awarded a $44 billion valuation in the process. Worldpay was much smaller with $3.9 billion in sales, but it grew quicker as its $1.9 billion in EBITDA number made for even fatter margins.

With shares trading at a pro forma 20-25 times earnings multiple, while leverage was coming in between 3 and 4 times EBITDA, I was fearful of the high valuation and wondered if 50% margins could be sustained over time.

A $109 stock on the deal announcement day rose to the $150 mark ahead of the pandemic. After the initial scare, shares only recovered to those levels, which was a wary sign as shares had fallen to just $50 in March.

This came as the business did not live up to its expectations, even as 2021 revenues of $13.9 billion and EBITDA of $6.1 billion came in far ahead of the pro forma numbers. Earnings of $6.55 per share came in closer to $6 per share if we adjust for stock-based compensation expenses, all while net debt came in at $18.4 billion.

The company guided for 2022 sales to rise towards the $15 billion mark (just below) with adjusted earnings per share seen around $7.31 per share. In reality, sales only grew by 5% to $14.5 billion, but the real issue is that adjusted earnings rose to just ten cents to $6.65 per share as net debt of $17.9 billion was hardly coming down.

Moreover, the company guided for 2023 sales at just $14.20-$14.45 billion, which is bad enough as it is, as adjusted earnings were seen at just $5.70-$6.00 per share, as the company took a huge $17.6 billion goodwill impairment charge on the Worldpay deal. The 593 million shares valued the business around $30 billion (equity, that is) at $50 per share, for an enterprise valuation below $50 billion. This incidentally was not off that much from both the standalone valuation in 2019 (pre-deal) of FIS itself, or the deal tag for Worldpay.

Instead of trying to fix the issue, the company announced that it would be looking to spin off the Worldpay business, as such a move would (largely) lock in the losses. That said, overall valuation were quite de-risked, although that leverage was a bit of a concern amidst stagnation in which the company clearly has self-inflicted wounds and operational performance issues, making that a speculative (and I stress the word speculative) position might be warranted.

That being said, it is important to note that FIS paid a great deal for the Worldpay deal in stock, so in that sense the real losers in this deal are the old owners of Worldpay, which sold at the top price, but took the wrong currency in exchange.

Stabilization

Since the end of March, the company has seen shares tick up from the lower fifties towards the $59 mark, here today. In April, the company posted first quarter results which were not spectacular, but strong enough to hike the full year sales guidance by $85 million on both the lower and higher end of the guidance. Adjusted earnings were now seen six cents higher, nothing substantial, but the direction of travel was comforting, although that net debt ticked up to $18.1 billion.

The big news arrived in July as the company announced an $18.5 billion deal to sell the majority stake in Worldpay Merchant Solutions in a deal in which it will obtain $17.5 billion in immediate proceeds, with the remaining billion being conditional on returns realized by the new owner, GTCR if the asset exceeds certain thresholds. Note that it does not mean that the $17.5 billion will flow as cash into the coffers of GIS, as it will receive $11.7 billion in cash and retain a 45% ownership interest in the business.

While the deal is rather complicated, in the sense that the company will continue to hold a significant minority interest in the standalone subsidiary, it should deleverage FIS a great deal. Quite frankly, the deal value implies that the valuation of the core operations of the business itself have come down a long way, which smells like an opportunity. If the company reduces net debt to $10 billion, pro forma leverage is seen around 2.5 times, leaving the business with $2.5 billion in excess proceeds to earmark for capital allocation purposes.

What Now?

The truth is that the deal will be pending until the first quarter of the fiscal of 2024 which creates some time overhang. Moreover, it is complicated in nature (in which FIS) will retain a significant minority interest, which will complicate finances for a while. That said, this deal structure allows Fidelity National Information Services, Inc. to recoup some of the losses from the too-expensive initial deal, while leverage is addressed and both businesses operates on a standalone basis.

Given this, I am still upbeat on Fidelity National Information Services, Inc., although that the situation is far too cloudy to hold a position in great size and with great conviction.

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