FIS’s deal to acquire Worldpay is not just the biggest deal for the payments sector: it means FIS overtakes Fiserv to become the largest processing and payments company.
Fiserv’s deal to snap up First Data for $22bn in January lasted a mere two months as the biggest-ever payments deal. FIS’s acquisition of Worldpay values the latter at around $43bn, including its net debt of almost $8bn. FIS shareholders will own around 53% of the combined group, with Worldpay shareholders owning the remainder.
The premium paid by FIS is not quite as large as the initial press reports suggested. The purchase price represents a 13% premium compared to the Worldpay share price pre-deal.
The Fiserv/First Data combination provides the impetus for consolidation in a fragmented market. As FIS chair, president and CEO Gary Norcross says: “Scale matters in our rapidly changing industry.” FIS/Worldpay will have pro forma 2018 annual revenue and adjusted EBITDA of approximately $12.3bn and $4.9bn respectively. In the main, analyst comment is positive. As my colleague Bhavika Shah, payments analyst at GlobalData, says: “The merger of FIS with Worldpay, originally acquired by Vantiv, represents full value at $43bn. “Worldpay, as of year-end 2018, held a 21% share of the US merchant acquiring market by value of acquired transactions, according to GlobalData’s Merchant Acquiring Analytics, making it the largest player in the US, in addition to its international presence in 146 countries.”
FIS, Worldpay: proven management
Executing deals of this size successfully can never be taken for granted, but to be fair, senior management at both FIS and Worldpay have successful M&A track records. FIS alone has executed more than 10 deals in the past decade or so.
Both firms currently spend more than 7.5% of annual revenue on innovation and technology, and that is unlikely to change. We can now expect to see FIS expand its acquiring and payments offerings. At the same time, the deal will help Worldpay expand into new territories – in particular, emerging markets such as India.
Worldpay’s reward solutions for cards and payments may complement FIS’s banking software to offer enhanced loyalty programmes in multiple channels. FIS will now be able to offer e-commerce services that are not currently part of its offering.
As for savings following the two megadeals, Fiserv and First Data forecast $900m in run-rate cost savings, and at least $500m in “revenue synergies” over a five-year period. FIS and Worldpay’s forecast savings are of the same order, estimating £500m of annual revenue synergies by the end of year three, with a further $400m in annual cost savings.
The press release confirming FIS’s acquisition correctly states that there is a risk that the integration of FIS and Worldpay will be more difficult, time-consuming or expensive than anticipated. It adds the predictable caveat that “there is a risk of customer loss or other business disruption in connection with the transaction.”
FIS will be acutely aware that, as issuer-processing contracts come up for renewal, there remain a number of live competitors in the sector. No financial institution, from the largest tier one to the smallest credit union, can credibly suggest that this year’s two megadeals are anti-competitive.
Future possible M&As: players to watch
Attention will inevitably turn to other major players in the sector, and it is a long list. Is there a better-performing player in the past year than Adyen? Its annual results, released on 28 February, beat analyst forecasts.
In the second half of 2018, Adyen’s net revenue in North America almost doubled, and Asia-Pacific revenue rose by over 120%. Adyen shares are up by close to 200% since its IPO last June.
Others to watch include Global Payments, Jack Henry, Wirecard and TSYS. The battle for payment-processing dollars in the SME sector, and TSYS going head to head with the likes of Square, Poynt and Stripe will be fascinating to watch.
And then there is PayPal: fresh from its $2bn-plus deal for iZettle last year – its 13th acquisition in all – it cannot be ignored for long as M&A activity in the sector accelerates.