The Green Sheet Online Edition
April 23, 2007 • Issue 07:04:02
KKR can't resist First Data 'cash-flow machine'
Cash flow can be irresistible, particularly to takeover artists like private equity firm Kohlberg Kravis Roberts & Co. That company, which is credited with perfecting the leveraged buyout, has agreed to pay $29 billion for First Data Corp., or $34 per share.
The acquisition makes perfect sense, stated Jefferies & Co. analyst Craig Peckham in a note to investors.
"FDC is a free cash-flow machine with maturing growth prospects ... and senior management is in the midst of transition, with CEO Ric Duques expected to 're-retire' this year."
The deal includes a 50-day "go-shop" provision allowing First Data's board to solicit other bids. "We believe the KKR deal likely is the best possible offer for the company," Peckham stated.
"For First Data, it's a huge plus," because consolidating its many platforms will be easier as a private company, said Michael L. Bratton, an ISO recruiter, training specialist and contract negotiator. And going private will enable the company to reinvest quarterly shareholder dividends.
Bratton doesn't believe KKR will get rid of First Data. He said the buyout firm, following acquisitions, tends to reduce the leveraged debt incurred, while driving profitability by trimming expenses.
Owning First Data will enable KKR's diverse holdings to perform cost-efficient on-us payment processing. "All these companies that KKR owns are going to get the benefit," Bratton said.
KKR businesses likely to benefit include retailer Toys R Us, media companies, hotels and resorts, and health care facilities.
"I'm assuming KKR will sell off underperforming business products or channels," Bratton said. He speculated that KKR will retain First Data's tier one merchants but sell its ISO channel, a saturated market in which merchant service providers are "signing the same merchant base year in, year out."
First Data has reported giving up some margin when large ISO contracts have come up for renewal in recent months.
As First Data seeks other bidders, TowerGroup Inc. analyst Theodore Iacobuzio believes two other sectors
will be very interested in owning their own integrated payment processor: issuing banks and giants in online search and auction businesses.
A year ago, Bank of America Corp. Chairman Kenneth D. Lewis expressed interest in buying a processor to enable the bank to settle its own credit card transactions.
"Citi would love to clear and settle on itself," Iacobuzio said, and Chase, HSBC or any big issuing bank "with lots of money and liquidity" could also make an offer. Iacobuzio is Managing Director and Practice Leader in TowerGroup's payments practice.
Software companies, some of which already own alternative payment systems, may also see advantages to owning their own credit card processor. Microsoft Corp., eBay, Google and Yahoo! could be contenders for First Data, Iacobuzio said.
Several investment banks have committed to providing debt financing to KKR for the buyout.
Business as usual?
Whether First Data proceeds with its announced consolidations of platforms and data centers this year and next (see "First Data plans U.S. platform consolidation," The Green Sheet, Feb. 26, 2007, issue 07:02:02) depends on KKR. "Once those doors close, KKR is going to do what they think is best," Iacobuzio said.
On a conference call with employees April 2, Duques said, "We do not expect that our private or public company status will affect the day-to-day service to our customers."
The company's platform and data-center consolidations will proceed, possibly at a faster pace, he added. "It is the intention of KKR and First Data to ensure continuity of operations and continued excellent service to our clients."
Iacobuzio speculated that KKR, a private company, would resell the processing giant quickly because regulators likely will demand access to scrutinize First Data's operations. "There may be pressure on KKR to flip this, either piecemeal or as a whole," he said.
First Data could have launched a brand to rival Visa U.S.A. and MasterCard Worldwide had it linked all its disparate parts, Iacobuzio said.
Using its VisionPlus card processing system would have been a key factor. "This is a very popular piece of software for processing all kinds of plastic," he added.
First Data reported recently that it moved several new and existing issuing clients onto VisionPlus platforms at five international locations, which in the United States includes Omaha, Neb.
Both ValueLink (now branded as First Data Gift Card) and the STAR Network could have been put to use in a broader strategy, Iacobuzio said, "but they've made no concerted effort to do so."
Since the deal was announced, First Data executives have tried to reassure clients that KKR will not drain the company of cash and then sell off its assets.
"While some cynics might scoff at this notion, KKR are very smart people with deep experience in analyzing diverse businesses," wrote David P. Bailis, President of Financial Institution Services at First Data, on his blog April 2.
"This is a business that is so strong and so attractive that a group such as KKR is willing to place a large bet on its future."
Duques said going private makes sense for First Data. "KKR has a great reputation with companies they buy," he added. "And on average, their holding period is about seven years, which is an extraordinarily long holding period for private equity firms."
With the exception of Duques, First Data's management team will remain in place.
Bratton predicted Pamela Patsley, Chief Financial Officer and Executive Vice President of First Data International, or Ed Labry, President of Commercial Services, would replace Duques as CEO.
Feeling First Data's pain
Despite the rosy view of KKR's intentions, other institutions began to mirror an alternate view of KKR's strategy. Within hours of the announcement, Standard & Poor's lowered First Data's corporate credit rating by several notches.
"The lowering of the corporate credit rating to BB+ reflects our view that First Data no longer possesses an investment-grade financial policy, in light of the announced debt-financed transaction," stated S&P analyst Philip Schrank.
The purchase price was a 26% premium over First Data's share price when the deal was announced. As more details of the acquisition emerge, First Data's rating could drop further, Schrank added.
Upper management may have needed little incentive to welcome the acquisition: All employee stock options will vest and be cashed out at $34 per share when the deal closes, Duques told employees.
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