‘Barbarians’ Get Set to Take over First Data in a $29 Billion Buyout

The leveraged-buyout craze caught up with the electronic-payment processing industry on Monday when No. 1 processor First Data Corp. announced it had struck a $29 billion deal to be acquired by investment firm Kohlberg Kravis Roberts & Co. Under the plan approved by Greenwood Village, Colo.-based First Data’s board of directors, KKR would pay $34 for each First Data share, a 26% premium over First Data’s closing price of $29.90 on Friday.n
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The deal provides for a 50-day “go-shop” clause in which a strategic review committee, comprising three independent members of First Data’s board, will solicit other proposals, according to a First Data spokesperson. Assuming no better offers emerge, First Data’s board could entertain unsolicited offers for a time. First Data and KKR hope to close the deal by the end of the third quarter.n
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“We believe that current market conditions present an exceptional opportunity to fulfill our commitment to maximize the value of First Data by delivering an immediate cash premium to our shareholders,” First Data chairman and chief executive officer of Henry C. “Ric” Duques said in a release.n
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The deal is one of the biggest LBOs ever. “This is huge,” says Les E. Riedl, president of Alpharetta, Ga.-based payments consulting firm Speer & Associates Inc. “If there is ever an example of barbarians at the gate, this is it.”n
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Riedl was referring to the book, Barbarians at the Gate, a chronicle of KKR’s $31 billion buyout of RJR Nabisco in 1989 at the peak of the 1980s LBO craze. Many of those transactions saddled the acquired companies with heavy debt. Already, some questions are emerging in the KKR-FDC deal. Securities rating agency Standard & Poor’s today cut ratings on First Data bonds to junk status, according to reports on the financial wires.n
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How a privately held First Data will operate was not immediately clear. “Under the direction of a world-class management team and with the strong support of its committed employees, First Data is at the forefront of the worldwide trend toward electronic payments,” said KKR member Scott Nuttall in the release. “We believe that through continued investments in its technology, people and customer relationships, First Data will build on its history of innovation and industry leadership. We look forward to working closely with First Data’s management team and clients to grow the franchise in the years ahead.”n
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Going private, though fraught with its own uncertainties, could prove beneficial for First Data if the move frees it up to make investments that have been postponed in an effort to placate Wall Street, some observers note. “The assets of that company are substantially understated in the stock price,” says researcher Steve Mott, principal at Stamford, Conn.-based firm BetterBuyDesign. “Try as they might, [executives at First Data] haven’t been able to explain to the equity marketplace why it’s worth more.” As result, he says, the company has felt investor pressure to enter into deals that raise cash, such as last September’s spin-off of Western Union Co., its biggest operating division. n
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The Western Union deal was part of a sweeping restructuring First Data undertook last year, which included a reorganization of its transaction-processing divisions. First Data flirted with the idea of selling its slow-growing division that serves credit card issuers, now called First Data Financial Institutions Services, but ultimately decided to keep it. The merchant-processing unit, now called First Data Commercial Services, is the biggest division in the restructured company. The biggest growth is coming from the First Data International division, which last week acquired a large processor in Poland.n
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Under new ownership, everything could be up for review again. “There’s a strong possibility of at least an evaluation and restructuring of the company around those businesses that First Data has that are the healthy heart of the organization,” says Riedl.n
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A key piece of First Data’s assets for KKR or any buyer will be its 49% stake in Chase Paymentech Solutions LLC, the massive merchant processor it operates in tandem with JPMorgan Chase & Co., which holds the other 51% interest. Some observers view this holding as potentially lucrative if spun out. According to an amended 10-K annual report First Data filed with the Securities and Exchange Commission last week, Chase Paymentech Solutions is growing fast and posting rapidly rising profits. It recorded $476 million in net income last year on $1.21 billion in revenue for a 39% margin, up from 35% in 2005 and 29% in 2004. Assuming First Data collected 49% of this profit, the processing unit accounted for 15% of its earnings last year. Revenue at the unit grew 49% in 2006 alone. “That’s a hell of a business,” says Mott. “That thing is going to be worth a fortune.”n
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A complication for a First Data buyer, however, could lie in any restrictions JPMorgan Chase could exercise over a spin-off of the merchant processor. “There could be a first right of refusal or some sort of provision like that,” says Mott, who estimates Chase Paymentech Solutions could fetch as much as 40 times earnings. “Does Chase have veto power? That would be an important piece of information to know.” JPMorgan Chase did not immediately return a call from Digital Transactions News seeking comment. n
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Right now, however, “it’s business as usual” at First Data, the spokesperson says. “We expect the current management will remain with the company.” As previously disclosed, however, Duques plans to retire once a successor is named, possibly by August, the spokesperson adds.n
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Seven investment banks have committed to debt financing for the deal. The spokesman says more details about the deal will be outlined in a proxy to be filed probably within a month. KKR, with its chief office in New York, has done more than 150 deals worth $345 billion since its founding in 1976, including 11 in the financial-services and processing sectors worth $35 billion. n
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Morgan Stanley & Co. is serving as First Data’s advisor.