Investors Smile on First Data’s New Look, Western Union Spin-Off

Despite some poor fourth-quarter financials, shares of First Data Corp. rose nearly 7% this morning after the big transaction processor announced plans to spin off its fast-growing and biggest subsidiary, Western Union, to First Data shareholders. Denver-based First Data also ended speculation that it might sell its lackluster Card Issuing Services operaton, saying it will keep the unit that provides bread-and-butter processing services to credit card issuers but reorganize it and other remaining businesses to jump-start growth. First Data brought in investment banker Morgan Stanley late last year to consider strategic alternatives for CSI. CSI's 2005 revenues fell 1% to $2.4 billion and operating profits dropped 10% from 2004 to $456 million. “We have concluded that our shareholders will derive long-term benefit from keeping the U.S. card-issuing business as part of First Data and taking concerted actions to improve this business,” First Data chairman and chief executive Henry C. (Ric) Duques said in a statement. Duques played host early this morning at an analysts' conference call, his first since rejoining the company two months ago in the wake of former chief executive Charles Fote's retirement. Keeping the cardholder and merchant units under one corporate roof would enable First Data as a full-service processor to attract a higher price were it to be sold, according to payments consultant Donald Smith, managing director of Strategic Management Partners in Omaha, Neb. He notes that a number of companies have entered the U.S. merchant-acquiring business in recent years, including two from the United Kingdom?Royal Bank of Scotland Group, the new owner of processor Lynk, and Sage Group PLC, which recently bought a Nashville, Tenn.-based independent sales organization, Verus Financial Management Inc., for $325 million (Digital Transactions News, Jan. 9). “Having the issuing and acquiring together provides greater value for any company that wants to take a look at them [First Data],” he says. “The sum of the parts is really greater than the whole.” Western Union is the world's largest money-transfer provider and by far the biggest entity in First Data's current Payment Services unit. Payment Services brought in 40% of the company's 2005 revenues and 49% of its operating profits. For the three months ended Dec. 31, Payment Services reported segment revenues of $1.20 billion, up 13% from $1.06 billion in 2004's fourth quarter. Operating profit rose 24% to $375.1 million from $303.4 million a year earlier. First Data plans a tax-free spin-off in the second half of the year to current shareholders. The newly independent Western Union's chief executive will be Christina A. Gold, currently the subsidiary's president. The spin-off also will include First Data's Orlandi Valuta and Vigo businesses. Under the new structure, CSI will become part of First Data Financial Institution Services along with the debit, Remitco, and Output Services units. It will be headed by David Bailis, current CSI president. The other two divisions will be First Data Commercial Services–which will include the present First Data Merchant Services, merchant debit, Telecheck, and prepaid units–and First Data International. Edward Labry, recently named FDMS president, will head up Commercial Services, and International will continue to be led by unit president Pamela Patsley. For the fourth quarter, First Data reported total revenues of $2.78 billion, up 3% from $2.69 billion a year earlier. But net income declined 14% to $397.9 million from $465.1 million after several special charges. For the year, revenues grew 15% to $4.26 billion from $3.72 billion in 2004, but net income fell 15% to $1.59 billion from 2004's $1.88 billion. The full-year charges included 23 cents per share in integration, restructuring, and impairment expenses. The company reported a per-share gain of 3 cents on the sale of part of its interest in a merchant alliance with PNC Bank. In mid-morning trading, First Data shares were up 6.7%, or $2.86, to $45.86 from Wednesday's $43 close.