Dive Brief:

• Payments processor Fidelity National Information Services, better known as FIS, plans to keep up to a 19.9% ownership stake in its Worldpay merchant solutions unit after it spins the business off next year, according to a recent FIS filing with the Securities and Exchange Commission.
• As part of the spin-off, which was announced in February, the Worldpay unit will raise new debt and use it to make an as-yet-unspecified cash payment to FIS, according to the May 2 filing. FIS said it plans to use that money to pay down its own debt and offset the cost of the transaction, among other general purposes.
• FIS, which also provides technology services, will take on higher-interest-rate debt as part of the transaction. “We expect that our weighted average interest rate after the spin-off will be higher than it was as of March 31, 2023,” FIS said in the quarterly filing.

Dive Insight:

With the spin-off, FIS is unwinding the $43 billion acquisition of Worldpay it undertook just four years ago in 2019. As part of that transaction, FIS paid about $35 billion and took on about $8 billion of debt. It now expects to make the Worldpay unit into a separate publicly-traded company by early next year, though FIS will still do business with it.

FIS is breaking up the business under pressure from activist investors who bought into the company last year and under the leadership of a new CEO, Stephanie Ferris, who took the top post in December.

In discussions with analysts, FIS executives have painted the spin-off as an opportunity to let Worldpay grow through acquisitions.

“We note that the primary driver of the spin was the need for Worldpay to pursue M&A and investment to support growth,” RBC Capital analyst Daniel Perlin said in report on FIS last month.

While FIS may encounter some near-term execution stress, the parent is expected to benefit in the long run. FIS will have a higher mix of recurring revenue after the spin-off, as it continues to benefit from banks and other financial institutions outsourcing technology needs, according to a report from the debt ratings service Fitch Ratings. By contrast, catering to merchants, as is the case at Worldpay, generates less consistent revenue.

“Merchant Solutions has more cyclicality, and FIS should benefit post spin-off from lower cyclicality over time,” Fitch said in a February report.

Aside from the spin-off, FIS has said it’s bolstering its business by way of a $1.25 billion cost-reduction plan this year. The company has cut 2,600 employees as part of the cost-cutting, according to the news outlet Bloomberg.

Nonetheless, there will be “significant” costs tied to the spin-off itself, and they remain unknown, according to the FIS filing with the SEC. There will be “some one-time costs and revenue and expense dis-synergies,” the filing said.

“FIS’s Future Forward cash flow savings plan likely illustrates the path to recoup some drag from dis-synergies,” Oppenheimer analyst Dominick Gabriele said in an April 28 report.

Fitch maintained its investment grade BBB rating on FIS, which has about $21 billion of outstanding debt, and marked it with a “stable” outlook. The positive traits of the FIS business include its large scale, strong market position, the diversification of its business and moderate leverage, at least relative to its rating category, Fitch said.

Nonetheless, BBB is the firm’s lowest investment grade rating in the U.S. “Fitch expects FIS to focus more on costs and margin improvement in 2023, with slowing in some areas of its business and further risks of consumer and/or macro softening,” the ratings firm said in its report. 

Overall though, Fitch noted the spin-off is indicative of industry trends making it more difficult for payments processors to compete. That leaves Worldpay with another challenge.

“The separation occurring so shortly after FIS’ 2019 acquisition of Worldpay signals an increased competitive landscape in merchant acquiring, with technology companies increasingly gaining traction in payments (particularly in mobile and e-commerce),” Fitch said.

S&P Global Ratings also said in February that its BBB investment-grade rating on FIS wasn't immediately affected by the spin-off announcement either. Though S&P noted that the restructuring "could keep leverage elevated in the near term."

Moody’s Investors Service also affirmed its investment grade rating on FIS in February. Still, it said in a report that jettisoning the merchant segment “will result in a smaller scale company with a less diversified business profile and reduced growth prospects.” It also noted that in light of the Worldpay integration being completed just last year, it should be a low-risk separation.