With an Eye on EFT, Fidelity Picks up eFunds with a $1.8 Billion Bid

The strategic review that payment processor eFunds Corp. disclosed May 9 ended today with the announcement that another processor, Jacksonville, Fla.-based Fidelity National Information Services Inc. (FIS), will buy e-Funds for $1.8 billion in cash. The purchase price of $36.50 per share represents a 5.5% premium over eFunds' Tuesday closing price of $34.60 and a 28.1% premium over the $28.49 closing price of May 8, the day before Scottsdale, Ariz.-based eFunds announced it was exploring options on whether to remain independent, be bought out by a private-equity firm, or merge with another company. If regulators and eFunds' shareholders approve today's definitive agreement, the acquisition would further diversify FIS, a big processor in the mortgage-services market that claims 50% of U.S. residential mortgage loans are processed on its software. Mortgage processing and related services account for 40% of FIS's pro-forma revenues and 80% of its operating income, according to a recent report from Morningstar Inc., an independent financial research firm based in Chicago. But FIS also owns the Certegy Inc. payment-processing business that its former parent company, Fidelity National Financial Inc (FNF), bought early in 2006. The acquisition will bring to FIS eFunds' big electronic funds transfer processing business, a risk-management operation that's highly regarded in the industry and includes access to more than 22 million closed-for-cause accounts, and a fast-growing prepaid card business thanks to eFunds' 2005 acquisition of WildCard Systems Inc. “Strategically, it makes a lot of sense,” Morningstar equity analyst Brett Horn tells Digital Transactions News. “My only concern with Fidelity is this is a company that's gone through a lot of changes in the past year. They've got a lot on their plate.” Besides absorbing Certegy and being spun off from FNF last November, FIS only on Monday announced that it bought San Francisco-based Applied Financial Technology, a maker of predictive software to assess prepayment risk in mortgages. Mortgage brokers, banks, and investors use AFT's software to price, fund, trade, and hedge mortgages and mortgage-backed securities. Wednesday's deal represents a merger of two mid-sized players in an industry where scale is important, says consultant David Lott, senior vice president at Alpharetta, Ga.-based Speer & Associates Inc. “It reflects that continued consolidation and perhaps [FIS] looking for niche product services that they didn't have,” he says. “It'll be a good addition to them.” Recent reports on the financial wires said several other companies expressed serious interest in or bid for eFunds, including Brookfield, Wis.-based Fiserv Inc., a bank processor and owner of the Exchange/Accel electronic-funds transfer network. A Fiserv spokesperson says the company doesn't comment on market rumors. An FIS spokesperson and an eFunds executive did not respond to Digital Transactions News inquires. In a statement, FIS executive chairman William P. Foley II said, “the acquisition of eFunds provides FIS with greater scale, extends our presence in the U.S. and international banking markets, and expands the distribution channel for our core processing and risk-analytic services. The addition of EFD's [eFunds' ticker symbol and new corporate moniker] complementary product offerings, including EFT and prepaid card processing capabilities, underscores FIS's commitment to provide the broadest range of products and services to our customers.” In the first quarter, eFunds reported net income of $11 million on revenues of $134 million. FIS posted first-quarter revenues of $1.12 billion and $59.5 million in net income. FIS expects to realize $65 million in annual cost savings after buying eFunds. The company will fund the deal, which it expects to close by the end of the third quarter, with cash on hand and through recently secured long-term debt commitments. Ironically, it's not FIS but its former parent company FNF, whose main business is processing and data-management services for the insurance industry, that is trying to buy Bloomington, Minn.-based Ceridian Corp., notes Lott. Ceridian's biggest businesses are payroll processing and related human-resources outsourcing services, but it owns fast-growing fleet and prepaid card processor Comdata Corp., which is more profitable. An FIS-led buyout would unite the former Certegy with eFunds and Comdata, Lott says. “Comdata is like eFunds,” he says. Ceridian is entertaining a $5.3 billion buyout offer led by private-equity firm Thomas H. Lee Partners L.P. that includes FNF. A restive hedge fund that is Ceridian's biggest shareholder, Pershing Square Capital Management L.P., is contesting the offer as too low.