A $22 Billion Fintech Tie-Up Aims at Square
(Bloomberg Opinion) -- Fiserv Inc. swiped First Data Corp. at just the right time.
While these payment technology companies aren’t household names, some shoppers and restaurant patrons may be familiar with First Data’s Clover product, a white countertop credit-card processing terminal that competes with Square Inc. Their tie-up, announced Wednesday morning, is also one of the biggest mergers of the year so far, with Brookfield, Wisconsin-based Fiserv agreeing to acquire First Data for $22 billion. Fiserv will assume the New York-based company’s $17 billion of net debt, borrowings that date back to a 2007 leveraged buyout.
The deal news happens to land on the one-year anniversary of the completion of a merger between the companies’ rivals, Vantiv and Worldpay Inc., as the fast-growing payments industry continues to consolidate. First Data began to look especially ripe for a takeover, given that its stock price had dropped 33 percent from an all-time high in September. According to CNBC’s David Faber, Fiserv initiated talks with First Data the following month.
Based on Fiserv’s average closing level over the last 20 trading sessions and the exchange ratio it agreed to, its offer was worth $22.07 a share to First Data investors at the time of announcement. That amounts to a nice takeover premium of 31 percent. However, analysts had been even more bullish on First Data, expecting to see its shares surge nearly 50 percent over the next 12 months. If their crystal balls are accurate, Fiserv timed this deal pretty well.
Beyond the stock activity, First Data was shaping up to be an attractive takeover candidate for other reasons. The company has been working to reduce its debt burden and improve profitability. Its ratio of net debt to adjusted trailing 12-month Ebitda was 5.3 at the end of the third quarter, down from about 8 when KKR & Co. took First Data public again in 2015. First Data suffered a $1.5 billion net loss that year, but earned $1.8 billion in the latest reported 12-month period.
First Data is a high-yield issuer, and in fact Bloomberg Intelligence analysts note that it’s the largest member of the Bloomberg Barclays U.S. Corporate High Yield Bond Index — even bigger than Dell Technologies Inc. Fiserv, an investment-grade company, says it will refinance First Data’s debt when the deal closes, pointing to one way the combined entity can save money. Overall, they peg cost savings at $900 million over five years from merging their businesses. According to Bloomberg’s merger calculator, even before synergies the transaction may boost Fiserv’s earnings per share next year by about 15 percent.
Still, mergers of this magnitude are never easy, and integrating the companies’ different technology poses a challenge. Fiserv’s stock fell about 7 percent at the start of trading Wednesday, which isn’t unusual given the risks in a deal this size, and that the acquirer opted to use its equity rather than borrow at low rates to make an all-cash acquisition. The transaction makes a lot of sense, though, and it could be one Fiserv shareholders learn to like.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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