First Data Undervalued?

by Raymond Pucci 0

First Data may think they get no respect, but those perceptions could be changing. After coming off the largest public offering in 2015, they are still the same company, but under more scrutiny given the quarter-to-quarter timeframe of shareholders. So far, Wall Street has not been impressed. But as the following article reports, the company is taking steps to be seen in a different light.

First Data has had more than its share of financial notoriety in recent years. In one of the largest leveraged buyouts ever, the big payment processor was taken private by Kohlberg Kravis Roberts in 2007 on the eve of the financial crisis, just after First Data had taken on $24 billion of debt. After extensive restructuring, it went public last October, in 2015’s biggest initial public offering.

Waning investor interest in tech-related stocks, especially those controlled by private-equity firms, prompted underwriters to price the offering on the low side. From there, First Data’s shares (ticker: FDC) sank another 30%, to last week’s $11. Investors have pretty much left the stock for dead.

The biggest of First Data’s units is global business services, which include its “merchant acquiring” unit that sells credit-card terminals to retailers and then services their accounts. It represents 59% of revenue. Second comes global financial services, such as data processing for banks, which make up 21%. Just behind, at 20% of sales, are network and security services, including the Star Network of ATMs.

Bisignano, a high-energy CEO with a straightforward manner, has installed a new management team, many of whom worked with him overseeing the mortgage business at JPMorgan and, prior to that, when he was the head of global transactions at Citigroup. He and Chief Financial Officer Himanshu Patel have cut net debt from $24 billion in early 2013 to $19 billion. Free cash flow, which was negative $60 million when Bisignano arrived, has turned into a positive $211 million in the first-quarter 2016. Annual cash debt payments have been halved, to $1 billion this year.

And then there is the refinancing of $4.6 billion of term loans that pushes the due date out several years, freeing up more cash flow to meet First Data’s obligations.
The changing capital structure has provided First Data with what Bisignano calls “escape” velocity to drive its turnaround.

First Data still remains an acquiring industry powerhouse but now has the additional accountability of public company status. They are on the right track with investments in technology solutions and product development investments, as their Clover platform is proving to be a rising star. Their high debt level will not go away overnight, and it remains to be seen whether that will continue to be a roadblock in the eyes of the investment community.

Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group

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