The bank-technology seller Fidelity National Information Services is moving forward with its plan to separate from payment processor Worldpay, but with new wrinkles that enable the two companies to retain some ties.
FIS on Thursday announced it has agreed to sell a majority stake in WorldPay to the private equity firm GTCR as part of a deal that values WorldPay at $18.5 billion. The agreement in and of itself was not a surprise.
"It is probably a function of the depressed environment for deals, as well as higher debt costs," said Aaron McPherson, a principal at AFM Consulting.
FIS executives had positioned the earlier agreement as a way to enable future acquisitions by separating the bank technology and merchant-acquiring portions of its business. On Thursday, FIS said the latest terms would provide funds for acquisitions while enabling Worldpay to speed technology development. FIS would also receive $11.7 billion upfront from the sale, which would enable it to pay its debt faster.
"The new agreement is an acceleration of the previously announced separation plan," Stephanie Ferris, president and CEO of FIS, said during a conference call to announce the deal, adding the plan would provide greater flexibility for both firms.
The transaction is expected to close in the first quarter, subject to regulatory approval.
"It's a fascinating climbdown for FIS," said Eric Grover, a principal at Intrepid Ventures. FIS acquired Worldpay to bolster its growth story. "Worldpay enjoyed healthy albeit not sizzling organic growth. It's e-commerce processing business is attractive, and it's easier to expand merchant processing abroad than FIS's other businesses like core-bank processing, bill payment, its debit network and issuer processing."
Taking companies private can also provide cover for technology projects that do not have the pressure of meeting quarterly earnings targets for shareholders since PE investors have a longer outlook than stock investors. It's a strategy that has worked at other payment processors in the past.
"GTCR is hoping to emulate what KKR did with First Data," said Richard Crone, a payments consultant, referring to
GTCR, which manages about $35 billion in equity capital, invests primarily in financial services, health care and media companies. As a private company, Worldpay would be able to pursue acquisitions and prioritize investments in new payment products, according to FIS' presentation during its conference call. Charles Drucker, Worldpay's former CEO, would be CEO of the GTCR-owned Worldpay, which is in line with the initial February plan. Ferris, who has presided over a cost-cutting overhaul at FIS over the past year, would join Worldpay's board.
Worldpay would retain its brand. FIS initially acquired Worldpay in 2019, part of a series of deals that combined bank technology and payment processing companies during that year as firms such as Fiserv, FIS and TSYS combined card issuing and merchant services to compete with Stripe, Square, PayPal and other technology companies offering payment technology to businesses.
"I'm not surprised that Worldpay is going to a private equity buyer. Merchant payment companies have been strong PE targets for the past 15-20 years," said Aaron Press, research director of worldwide payment strategies at IDC, noting Worldpay is the result of a PE-led roll-up of a handful of payment companies by Advent. "For FIS, a PE buyout is less effort and carries a lot less uncertainty."
As a combined company, FIS merchant business accounts for 30% of its total revenue with core banking making up 46% and capital markets making up the rest of the business. About half of Worldpay's clients are large businesses, with small businesses and e-commerce sellers making up about a quarter each.
"It's a saturated market, and the growth is coming from the smallest merchants right now," said Crone, adding the traditional payment companies are under pressure from the payment fintechs. "You can download Stripe's software development kit, embed card acceptance and can be [accepting payments] in a matter of minutes. And you pay per transaction."
By maintaining a stake in Worldpay, FIS would retain a commercial relationship between the two companies. This means FIS would use Worldpay as a distribution channel and Worldpay would have access to FIS's banking and treasury service products. FIS did not take questions during its conference call and did not provide comment for this story, citing the quiet period before FIS reports quarterly earnings.
"Worldpay will have the benefits of its brand and the energy of an independent private company that's backed by a large PE firm," Ferris said, adding the deal would enable Worldpay to resell embedded banking services."
Embedded banking, which uses payment credentials to sell a variety of financial and nonfinancial products, has become a major trend in financial services technology.
"Even though FIS doesn't want to run a merchant-facing business, they still see the value in having a strong merchant services component in the portfolio," Press said.
The deal enables FIS to better retain the value of the integrations they have already done or are already in flight, according to Press. And if GTCR is successful, FIS stands to benefit financially when GTCR makes an exit, Press said. "I suspect GTCR also sees that value in having a partner with strong ties to the bank channel."
