|
Published: June 1, 2010
On May 6th, a group of heavyweight private
equity firms began to circle the wagons. The aim: the largest
private equity
buyout since the financial crisis began in 2007, a deal
estimated to be worth nearly $15 billion.
Discussions continued for almost two weeks, but a final
agreement was never reached. The press hasn't been able to fully
explain why the deal was never sealed. Shares lost as much as
-20% of their value in the aftermath.
So who were the players in this Wall Street game? Private equity
giants Blackstone Group, TPG Capital and THL Partners. Their
target? Fidelity National Information Services Inc. (NYSE:
FIS), an undervalued payment processing firm. The deal would
have would have valued the firm at about $32 a share, but in
this case, individual investor's can own the company for much
less than that.
The reasons why the deal fell through are two-fold. For
starters, Fidelity National was holding out for a higher price
and balked at what it saw as an initial bid from the private
equity consortium. Second, credit markets started to freeze up
during the negotiations as a result of the debt crisis in Greece
that quickly spread throughout Europe. This would have made
raising the debt to close the transaction very difficult.
The fact that the buyout was never consummated represents a
unique opportunity for individual investors to profit off the
backs of the work private equity put into valuing Fidelity
National.
The company bills itself as a leading provider of technology for
processing banking payments across the globe. The firm's
software is used to allow deposit and lending systems to work
across bank branches, the Internet, automatic teller machines
and call centers as well as communicate with outside financial
institutions.
The appeal for the private equity firms in this deal is clear.
These transaction systems throw off stable, prodigious
cash flow. Better yet, many of these functions are
considered mission-critical and can't be cut back or turned off
during a business downturn. In Fidelity National's case, the
firm produced just more than $500 million in
free cash flow off of $3.8 billion in total revenue last
year, for a free cash flow margin of 13.2% -- impressive in what
was an extremely difficult economic environment. Fidelity
National provides services to more than 14,000 financial firms,
including 40 of the 50 largest global banks.
Significant profit upside exists with
Fidelity National. Management has been focused on buying out
industry rivals, which is important, as scale helps lower costs
per transaction and wrings further profits out of the large and
growing sales base. Most recently, it acquired archrival
Metavante in October 2009. Sales are expected to exceed $5
billion this year as a result. Combined with cost cutting moves,
this should push earnings to $2 per share. A commensurate amount
of free cash flow is a conservative estimate as it assumes only
flat year-over-year cash flow growth.
Disappointment when the deal fell through combined with a market
correction sent Fidelity National's shares quickly back to the
mid-$20 range. In order to fend off another buyout attempt,
management is planning to issue debt and repurchase a large
amount of the common stock.
In other words, those hoping for upside from an acquisition are
out of luck. However, reported earnings will see a boost with
less shares outstanding after the recapitalization. This also
means that cash flow will go to service the debt and to
creditors instead of shareholders for a while.
Still, $32 a share is a very reasonable value to place on
Fidelity National's stock. The price is about +15% above current
levels and, as mentioned above, management believes the firm's
value is even higher. Considering the current state of the
existing business and upside potential from the integration of
Metavante, they're probably right.
Action to Take --> A
combination of further acquisitions and organic growth has led
to double digit sales growth during the past five years and
steady, high single-digit cash flow growth. Coupled with
multiple expansion opportunities, this could indicate
double-digit stock returns for investors for at least the next
three years.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
