What Now for First Data?

Its IPO finally done, the big processor looks to jump-start growth.

Okay, it wasn’t a barnburner. But by completing a long-anticipated initial public offering of stock Oct. 14 that netted about $2.6 billion, First Data Corp. somewhat eased the burden of its $20.8 billion debt millstone. And it created more opportunity to improve its competitive position and future profitability.

So what now for the biggest payment processor, whose stock now trades on the New York Stock Exchange under a ticker symbol it hasn’t used for eight years, FDC?

The answer sounds simple. But it’s not, especially the second part: Continue to chip away at debt while working harder to drive growth in transactions and revenues.

“For eight years, they’ve been growing appreciably slower than the market,” says consultant and long-time First Data watcher Eric Grover, principal of Minden, Nev.-based consultancy Intrepid Ventures. “In the U.S. they’re huge … but most of their competitors are growing faster.”

‘Biggest IPO of the Year’

The IPO, if it was meant to convey First Data’s coming-out party after buyout firm Kohlberg Kravis Roberts & Co. took it private in a $29 billion leveraged buyout in 2007, was somewhat of a disappointment. First Data had hoped to get $18 to $20 per share, but it ended up pricing the IPO at $16.

“By conventional measures of an IPO, it wasn’t spectacular,” says Gil Luria, managing director at Los Angeles-based Wedbush Securities.

Why the IPO fell short is a matter of debate—was it something about First Data, or something else? Some observers noted that First Data was caught in an autumn stock-market downdraft. To go forward, numerous IPO candidates had to reduce prices to attract investors.

“It’s not just about the companies, it’s about the market,” says Kathleen S. Smith, principal at Greenwich, Conn.-based Renaissance Capital LLC, which specializes in monitoring the IPO market.

All the IPOs in September and October went for discounts, with the average price on 23 deals 20.5% below their stated mid-point range, according to Smith. “This is not a scarlet letter for First Data,” she says.

First Data chief executive Frank Bisignano, a senior JPMorgan Chase & Co. executive whom KKR hired in 2013 to get the company in shape for an IPO, played up the positives.

“It was the biggest IPO of the year and a validation [by] the market of the significant transformation that this company has been going through over the past two-and-a-half years,” he told analysts Oct. 27 during a conference call to review the company’s third-quarter results.

‘A Much Healthier State’

Despite the lower-than-hoped-for IPO price, Luria says First Data still accomplished what it wanted to accomplish, which was to raise equity capital to pay down debt. “It put them in a better position to refinance some of that debt at more manageable rates,” he says.

In recent years, First Data typically has recorded a quarterly operating profit, but its massive interest expense consistently produced red ink.

In 2014, the company posted an operating profit of $1.44 billion on $11.2 billion in revenues, but reported a net loss of $457.8 million after paying $1.75 billion in interest, along with other expenses.

After the IPO, First Data got right to work exchanging some of its high-cost, junk-rated debt securities for new ones paying much lower interest rates. For example, on Oct. 30, the company priced $3.4 billion in senior notes paying 7% and will use the proceeds, along with funds from the IPO and its revolving credit line, to redeem various securities paying 10.625% to 12.625%. First Data expects the refinancing to shave $160 million off its annual interest expense.

On Nov. 5, First Data priced $3.2 billion in two issues of senior secured notes paying 5% and 5.75% to pay down notes paying 8.75% and 8.25%, thereby saving another $72 million in interest.

Jared Drieling, business intelligence manager at Omaha, Neb.-based payments consultancy The Straw?hecker Group (TSG), whose ranks include a number of First Data veterans, says the IPO put First Data’s finances in “a much healthier state” than they were a year earlier.

“What’s key here is, being in that healthier state, it allows some breathing room,” says Drieling, who joined TSG in mid-2014 after working at First Data for 12 years, most recently in the merchant unit’s product group.

Going for Growth

But the fast-changing payments industry affords First Data little time to rest. Besides taming its debt beast, the company’s more difficult job may be to jump-start growth. Last year, total revenues grew only 3%, and in 2015’s first nine months, they were also up by 3% versus a year earlier.

Growth in the merchant unit, Global Business Solutions, which is First Data’s biggest division and serves 4 million U.S. merchants and another 2 million abroad, was only 2% in the third quarter, though it was 6% when adjusted for currency fluctuations.

“What they need to demonstrate is they can grow existing business and they can realize synergies across the portfolio,” says consultant Grover. “If they can, they can be an interesting story, but they have to show growth.”

First Data did not make an executive available for an interview with Digital Transactions. But at the third-quarter conference call, Bisignano and chief financial officer Himanshu Patel said products and services are improving as the company’s financial health improves.

“We are in the market every day talking to clients and we’re building solutions with clients,” Bisignano said. “As you know, we’ve spent a lot of money on sales-force expansion, both globally and within the U.S.” He added that clients want “more technological solutions” for everything from the point of sale to security.

Low-hanging fruit for First Data and other merchant acquirers has been the U.S. conversion to EMV chip card payments, which is driving sales of new POS terminals.

Beyond EMV, much of First Data’s product strategy rests on the Clover line of hardware and applications to capitalize on the trend of mobile and app-based payments at the point of sale. Clover tablet-based devices, including the new Clover mini, are now the standard offering for First Data’s small and mid-size merchants.

Annual sales of all Clover versions are now “comfortably north of 150,000 units and it’s growing at a pretty regular pace, weekly and monthly,” Patel said.

Clover handles numerous business-management apps in addition to payments, which could increase merchant retention and thus the bottom line. What strong adoption of Clover “would mean is more revenue per merchant and less attrition, and that would be ideal,” says Grover.

While analysts don’t expect First Data to post growth rates like those of newer merchant processors such as Square Inc.—which in mid-November was doing a road show for its own planned IPO—they do say First Data has plenty of other opportunities to exploit.

“For some time, especially with the debt load, the international segment has been put on the back burner,” says TSG’s Drieling, noting that international has accounted for 25% to 30% of revenues in the past. (The company no longer reports international as a separate segment.)

‘A Huge Opportunity’

First Data operates in about 35 countries, with its strongest presence outside the U.S. in the United Kingdom and Germany. But Brazil is now open to foreign companies, and India and China hold long-term promise. “There’s a huge opportunity,” says Drieling.

Grover also says First Data hasn’t yet fully exploited the opportunities afforded by strengthening the ties between its merchant unit and its second-biggest division, Global Financial Solutions, which handles card processing for about 4,000 financial institutions and retail card issuers and has 809 million North American cards on file.

Mining cardholder data could enable merchants to develop targeted rewards and more revenue-generating transactions for First Data, Grover says. “The promise of leveraging that data, of touching all of those consumers and merchants … that’s real,” he says.

Other growth candidates include First Data’s big prepaid card business (both plastic and digital) and the Star debit network. Despite the boom in debit’s popularity, Star has lost market share under First Data’s ownership in the face of strong competition from Visa Inc. and other networks, at least until recently.

“The Star network was not receiving a lot of attention,” says Drieling. “I definitely see that being turned around over the last two years.”

Bisignano said he realizes “a lot of work is still ahead for us,” but that First Data is on the right track.

“The transformation of our company will not happen in a single quarter,” he told analysts. “We have laid a great foundation and will continue to invest and build on it.”