FIS/Worldpay: finserv group should not rush for a divorce

Corporate mergers fail more often than marriages. Those keeping score can add another name to the first list. US financial software and services group Fidelity National Information Services (FIS) has unveiled plans to spin-off Worldpay, the merchant payments business it acquired for $43bn just four years ago. Today, FIS is worth just $38bn after shedding more than 42 per cent of its value in a year.

Though not a household name, FIS provides the technology that keeps the retail banking system humming, especially for smaller banks. It offers everything from services that keep track of customer deposits to complex back-office trading operations.

FIS entered merchant payments by acquiring Worldpay. Including debt, FIS paid the equivalent of 24 times ebitda. Arguing that more scale would produce more profits, it predicted that the combined companies would generate $15bn in revenue and up to $4.5bn in free cash flow within three years.

Promises, promises. Not only did FIS fail to successfully integrate the business, it could not offer its core clients any better digital payment solutions than other fintechs. Small and medium-sized businesses, which equal about half of Worldpay’s revenues according to Mizuho, defected to rival payment providers such as Square, Toast, Clover and Shopify.

The shift further accelerated during the pandemic. FIS’s traditional banking services unit faces headwinds as banks cut back on spending.

The case for spinning off Worldpay seems straightforward enough. FIS shares trade on an enterprise value to forward ebitda of less than 9 times. Apply sector median multiples to FIS’s three main business segments — Banking, Merchant, and Capital Markets — and FIS could be worth around $64bn. That is about 68 per cent more than current valuation.

This is a generous forecast. The reasons for considering the ability of FIS managers to destroy value are valid. Just spinning off Worldpay will not fix the group’s problem.