FIS walks back Worldpay merger with spinoff plan, stock tumbles

FIS and peers Global Payments Inc.
GPN,
-2.49%
and Fiserv Inc.
FISV,
+0.47%
have been known as the “deal stocks” within the payments universe, as all three announced big mergers in the first half of 2019. FIS’s stock has been the weakest performer of the bunch since the time of the company’s $43 billion Worldpay acquisition announcement — a deal one analyst recently called “underwhelming.”

The spinoff of Worldpay is expected to be conducted in a tax-free manner and completed within 12 months, according to Monday’s release. FIS shareholders will receive a pro-rata distribution of shares in Worldpay, though the company has yet to determine the actual number of shares that will be distributed.

“In evaluating a broad range of alternatives as part of our previously announced comprehensive assessment of FIS’ strategy, businesses, operations, and structure, FIS management and the Board concluded that the spin-off of Worldpay will unlock shareholder value by improving both companies’ performance, enhancing client services, and simplifying operational management,” Chairman Jeffrey Goldstein said in the release.

Chief Executive Stephanie Ferris added that the move “will enable FIS to target a strong investment-grade credit rating, while allowing Worldpay to invest more aggressively for growth.”

Shares were off 13.9% in midday trading Monday and on track to log their fourth largest single-day percentage decline on record.

SVB MoffettNathanson analyst Lisa Ellis wrote that she and others were hoping FIS might sell the merchant business if it indeed decided to part ways with it.

“This outcome may still come to pass (once FIS more fully separates Worldpay), but the fact that it has not happened already suggests that an obvious, eager strategic buyer has not presented itself – another indicator that the business is likely deteriorating rapidly,” she wrote in a note to clients.

The merchant business will operate under the Worldpay name, “reestablishing and strengthening a brand that remains highly trusted among clients and partners,” according to the release. Charles Drucker, who was formerly Worldpay’s CEO, will be a strategic advisor during the spinoff process and will return to the top post at Worldpay if the spin “is completed as expected.

Mizuho’s Dan Dolev dubbed the official announcement “bittersweet” and “bold.”

“Plus, the return of quasi-Vantiv founder Drucker as CEO of [Worldpay] puts the business in great hands,” Dolev said in a Monday note to clients. “His task will be to revive the ailing SMB [small- and medium-sized business] book and accelerate e-commerce growth.”

FIS also reported earnings Monday for its fourth quarter, noting that it took a $17.6 billion non-cash goodwill impairment charge related to the merchant-solutions business during the quarter.

Factoring that in, the company generated a fourth-quarter net loss of $17.4 billion, or $29.28 a share, versus net income of $291 million, or 47 cents a share, in the year-earlier quarter. On an adjusted basis, FIS earned $1.71 a share, down from $192 a share a year before, while analysts tracked by FactSet were anticipating $1.70 a share.

Revenue inched up to $3.71 billion from $3.67 billion, while analysts were modeling $3.69 billion.

For the full year, FIS executives expect $14.20 billion to $14.45 billion in revenue along with $5.70 to $6.00 in adjusted earnings per share. The FactSet consensus was for $15.00 billion in revenue and $6.57 in adjusted EPS.

The outlook highlights “continued softness in the core businesses,” Jefferies analyst Trevor Williams wrote.

FIS pushed up the date of its earnings report, having previously scheduled it for Wednesday.