(Bloomberg Opinion) -- Every deal in the payments business looks expensive – until the next one comes along. Fidelity National Information Services Inc. is paying a heady $34 billion plus for Worldpay Inc. not much more than a year after the rival payments processing company bulked up with an expensive takeover of its own.
The logic of the combination is simply greater scale and scope. FIS has broader reach and wants to deploy Worldpay’s technology and services in markets that the target doesn’t already dominate. Hence the financial benefits of the combination are expected to come from a projected $500 million boost to revenue, with cost savings put at $400 million. Combined, the companies would have had operating profit of $2.4 billion in 2018.
The industry is consolidating: witness Fiserv Inc.’s agreement to buy First Data Corp. for $22 billion in January.
FIS’s cash-and-shares offer is worth $112 per Worldpay share based on its March 15 closing price. That’s a 14 percent premium, pretty humdrum by the usual standards of M&A. But it jumps to 28 percent if you use the duo’s three-month average share prices, making the top-up about $7 billion. What’s more, with almost of the deal being funded in stock, Worldpay shareholders should get a share of the value creation.
Assume the financial benefits are achieved in the three-year schedule, they could be worth nearly $9 billion in today’s money when taxed and capitalized on FIS’s multiple. That seems reassuring.
The difficulty is that Worldpay is already highly valued, trading at 21 times 12-month trailing Ebitda against FIS’s 14. Achieving decent returns will be harder than the low-ish premium would otherwise suggest. The all-in cost including assumed net debt is $43 billion, FIS says. Worldpay’s forecast 2022 operating profit plus the full synergies would be $3.6 billion.
After tax, the returns from the deal would fail to exceed the duo’s 8 percent cost of capital. That assumes full delivery of the revenue synergies, about which investors will be wary without proof they can actually be delivered. It also depends on FIS not being forced to offer more by a counterbidder. At these toppy levels, though, that would be a brave bet.
Perhaps FIS is being cautious and has some extra cost savings in the bag, but it looks like it has no margin for error. Then again, payments isn’t an industry that lends itself to bargain hunting. Worldpay Inc. was created when Vantiv Inc. paid $13 billion, or 22 times trailing Ebitda, for London-listed Worldpay Group Plc last year. Hellman & Friedman LLC paid 18 times Ebitda for Nordic payments group Nets A/S the same year.
It all feels a long way away from Royal Bank of Scotland Group Plc’s sale of Worldpay a mere 2.2 billion pounds ($2.9 billion) back in 2010. But being bailed out by the taxpayer comes with an opportunity cost.
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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