Breakingviews: Fintech giant’s bad wedding leads to happy divorce

Many mergers fail, but executives are rarely humble enough to admit it. At Fidelity National Information Services, purveyor of software to banks, it’s taken a new boss to bring on a shift. Appointed in December, Chief Executive Stephanie Ferris’s first major move at the helm is to undo a $43 billion deal the company made four years when it bought payments processor Worldpay.

Rabble-rousing shareholders D.E. Shaw and Jana Partners argue the deal shouldn’t have been done in the first place. They have a point – FIS paid $3 billion more for Worldpay than the combined companies’ market value today. Its shares have halved since the deal closed in July 2019.

Worldpay currently brings in some 30% of FIS’s income, mostly by serving small businesses and restaurants. These are worlds apart from the staid financial institutions which patronize FIS’s core software business. The two parts of the company also have very different dynamics: 80% of FIS’s core business revenue is recurring, while payments revenue depends on transaction volumes and on acquiring new customers through M&A. FIS’s payments-focused competitor Fiserv is valued at 10 times expected EBITDA, while rival banking-software giant Jack Henry & Associates trades on an 18 times multiple.

These comparisons suggest a split should unlock value. Worldpay’s performance is middling: Executives expect revenue from the payments division to shrink in 2023, while its core business will grow modestly. Assume the separation reverses the $400 million in cost synergies FIS promised when the deal was first announced. Then put Worldpay’s remaining estimated 2023 EBITDA, using Refinitiv forecasts, on a modest 9 times multiple. As long as the remaining banking-focused business is valued at more than 11 times expected EBITDA, the combined enterprise value of the two separate companies will be higher than today.

The separation also gives both parties more options. Worldpay could take on more than its share of FIS debt. As a stand-alone company the payments firm could also borrow more to fuel future purchases without imperiling its former parent’s credit rating. And separating it through a spinoff to shareholders rather than a direct sale allows FIS to save on taxes in the near term, while keeping the door open for a buyer to scoop up Worldpay down the road. Ferris inherited a bad marriage. Shareholders will be hoping for a happier divorce.