Merchant-Unit Spinoff, $17.6 Billion Writedown, Slips by FIS

The shares of Fidelity National Information Services Inc. plummeted after it booked a $17.6 billion writedown on the payment-processing business it purchased for $41 billion just four years ago. The business is now planned to be sold.

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According to a statement released by the fintech company on Monday, the company plans to pursue a tax-free spinoff within the next year. A separate statement from the company indicated that the impairment charge resulted in a loss of $17.4 billion in the fourth quarter due to the impairment charge.

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“I believe that this is a sign that the Mizuho Securities acquisition was a huge failure,” according to Dan Dolev, an analyst at Mizuho Securities who has been calling for a spin-off of the merchant business for years now. “As a general rule, when dealing with an ailing company, it's much better to roll the dice, give it a year and see if it can be turned around, and then relaunch it into the public market a year later." 

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In recent years, both traditional competitors as well as a number of upstarts have taken a considerable share of the merchant business. There are several reasons for this, including the fact that it has been tethered to FIS and has largely been unable to do more mergers and acquisitions that would allow it to scale up, said Stephanie Ferris, chief executive of the company. 

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Ferris said that a return to more consistent M&A activity is one of the key components of the company's growth strategy. “As the parent of FIS, I can't provide it with the M&A that it needs to grow. "

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There is a larger plan for Ferris to reshape the financial-technology giant with this spinoff as part of the broader plan. In the short period of time, since Ferris has taken over the company, he has carried out a wide-ranging review of the company's strategy, operations, businesses, and structure. The company has already eliminated 2,600 jobs as part of its turnaround efforts and is now planning to save as much as $1.25 billion as part of her efforts to turn the company around. 

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“It is our intention to create two more focused, agile companies that can pursue tailored strategies that are aligned with specific long-term growth opportunities," Ferris stated in the statement. “It is our belief that, as separate companies with a commercial relationship, we will be able to deliver a superior outcome as both companies will be market leaders in their own right."

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Along with the spinoff announcement, the company also revealed guidance on revenue and profit that fell short of the expectations of analysts. The price of FIS shares fell by 14% to $64.52 at 10:27 a.m. in New York. In the last year, they have lost 42% of their value, compared with an 8.9% decline in the S&P 500 Information Technology Index, which has lost 42% of its value.

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Worldpay Acquisition

In a deal that was valued at about $41 billion at the time, FIS acquired the bulk of the merchant-payment business when it acquired Worldpay Inc. nearly four years ago in a deal that was estimated to be worth nearly $40 billion at the time, according to data compiled by Trade Algo. Almost one million merchants around the world are able to accept payments through the business, which processes more than 100 million transactions every single day. 

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The deal was one of three multi-billion-dollar payments deals that took place in 2019: Rival Fiserv Inc. acquired First Data Corp. during that year, while Total System Services Inc. bought Global Payments Inc.

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A statement from Worldpay said that Charles Drucker, the former CEO of the company, will rejoin the company as a strategic adviser and will take over as CEO of the business after the spin-off is concluded. Both Ferris and Drucker have worked together since they were at the payment-processing division of Fifth Third Bancorp in the early 2000s when they both worked for the same company. 

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It was in 2009 that Fifth Third spun out the division in order to create Vantiv. During the time that Drucker and Ferris were senior executives at Vantiv, which was then merged with Worldpay in 2018, and which helped sell the combined entity to FIS in 2019 as a result of the merger. 

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"Charles and I feel very confident given the fact that this will be the third time we'll have spun it out, sold it, and then spun it out again," Ferris said, noting FIS has no plans to break up the merchant unit before spinning it out. “So we’re really familiar with the cost structures and the benefits that come with putting it in and taking it out.”

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FIS, established in 1968, has long been known for providing financial institutions with technology related to banking and capital markets. There are more than 50,000 employees employed by the Jacksonville, Florida-based company across 50 countries, according to the company's website. 

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This year, the company expects revenue to swell to $14.45 billion, a slightly lower number than the $15.1 billion analysts expected in a Trade Algo survey, which was based on the company's projections. It is estimated that the adjusted earnings per share will reach as high as $6, which is also lower than analysts had estimated. 

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“FIS's forecast for 2023 came in significantly below our consensus expectations, as we had feared,” Vasundhara Govil, an analyst at Keefe, Bruyette & Woods, wrote in a note to clients.