Analysts are predicting further consolidation across the payment space following US financial conglomerate FIS’s decision to spin off its merchant business.
Earlier this month, FIS said it would carry out a tax-free spin off of its underperforming merchant unit which it built around Worldpay, which facilitates card transactions.
FIS acquired Worldpay four years ago for $43billion to create a financial infrastructure giant. But the marriage hasn’t worked.
The move by FIS to hive off Worldpay comes amid heightened competition in the payment sector, with startups taking share from traditional players by providing zippy services to merchants and consumers.
Worldpay’s business spans enterprise, e-commerce and the SMB market but competitors including the likes of Toast, Clover, Block, Shopify, Stripe, PayPal and Adyen have taken market share from it.
More financial legroom following spin off
FIS top executives claim that by spinning off the business, they will have more financial flexibility to strengthen Worldpay with investments and acquisitions in high-growth sectors. This strategy was not feasible before as Worldpay was too closely linked to the FIS business.
FIS CEO Stephanie Ferris said: “We haven’t been able to allocate any capital historically or as we move forward into M&A. And that’s really been a big weakness for us in the payments business. I think if you look at our peers they’ve been doing M&A over the last couple of years.”
However, critics, including activist investors DE Shaw and Jana Partners, argue that FIS should have never acquired Worldpay. FIS has a core processing systems business that serves financial institutions and a capital markets division used by investment firms.
“Analysts, though, believe despite FIS’s woes the move to spin off the Worldpay business is a sensible one.”
FIS’s shares have tanked
Critics point out that FIS’s share has halved since the deal, indicating that it was a botched deal.
Moreover, they highlight that FIS and Worldpay businesses have wholly different customer bases and revenue models. FIS’s revenues primarily recur while Worldpay’s are vulnerable to consumer spending.
Critics have pointed out that FIS’s rivals, who made similar purchases to Worldpay, seem to be performing better than FIS.
At a similar time to FIS buying Worldpay, Global Payments acquired payment platform TSYS in a $21.5billion deal and Fiserv splashed out $22billion on payment processor First Data.
Moshe Katri, analyst at Wedbush Securities said: “Fiserv had a very strong quarter. The First Data part it acquired grew nicely. It is kind of interesting because you have one company where this combination has been working well, maybe two of them [Global Payments], but with FIS they decided to part ways because maybe they just believed maybe if you have different leadership, different focus areas [it will work better].”
Ferris suggested that FIS looked at a potential sale of the Worldpay business as an alternative to the spinoff.
Ferris said: “I think we are focused on the spin of the whole business. The fundamentals of a merchant business are that they scaled platform with global distribution.
“We certainly looked at pieces and parts. But I think that that path for this particular business is to spin the whole thing.”
To sell or not to sell
Whether Global Payments and Fiserv would have been in the running as potential acquirers is unlikely, analysts say, given both businesses are leveraged and given the size of the potential deal.
Katri said: “There is the issue of selling anything at this point in the market. You have seen multiples of valuations of fintechs plunge.
“I think you are better off bringing in a capable management team to try and pretty much rejuvenate and reposition the business.”
Ken Suchoski, an analyst at Autonomous Research, said a Worldpay acquisition would be “hard to digest” as it’s such a big asset.
He added: “I think FIS like the business, so think they can turn it around. I am assuming they looked at a sale but not sure if anybody would be interested, as it is underperforming.”
As competition across the payment sector heats up, analysts are expecting consolidation amid falling valuations with bargains to be had, along with other big strategic moves.
Kuchoski said: “My guess is that you will probably see M&A pick up in this space over the next year because I think a lot of these assets, especially these newer players, where they just had really high valuations because interest rates were low and investors were willing to pay up, the air has been deflated and come out of the balloon a little bit.”
Katri says that Global Payments has been more acquisitive than FIS and Fiserv and will continue to be so.
Last year, for example, Global Payments agreed to snap up smaller US rival EVO Payments for nearly $4bn.
“Global payments will continue to acquire. They have done a really good job in terms of positioning themselves competitively,” says Katri.
Consolidation on the cards
“I would say FIS’s track record has been mixed.”
He adds: “You will probably continue to see consolidation in this market, there is no doubt about that, especially when you look at some of the companies that went public in the space a year or two years ago and are still not profitable and their stocks are easily down 70 or 80 per cent.”
For example, shares in US restaurant payment firm Toast, which is not profitable, are now priced at $20, half of what they were in September 2021. Other payments fintechs are also experiencing a decline due to weakening consumer demand.
Another big strategic move could be payments giant Stripe. soon going public.
Meanwhile, FIS has plenty on is plate. It has cut thousands of jobs since it announced the strategic review of the business last year. It has also earmarked cost savings of $1.2billion as it looks to reposition the business.
Analysts, though, believe despite FIS’s woes the move to spin off the Worldpay business is a sensible one.
“On the positive side, following the spinoff, FIS will return to being primarily a bank tech provider. This business while lower growth, is relatively predictable and stable, and we believe this segment has the strongest moat among FIS’ businesses,” Morningstar said in a note.