Shares in payment processing giant Worldpay (WP) surged yesterday on news of a merger with FIS (FIS), valuing the deal at $43 billion. This merger follows closely on the Fiserv and First Data combination and suggests that FIS didn’t want to be left behind following its peers' big move.
We are increasing our fair value estimate for Worldpay to $111 per share from $93. Our new fair value estimate is based on the current market value of the FIS shares and the cash offered in the merger, as we believe this deal is likely to be completed. If the deal falls through, our standalone for Worldpay is $93 per share.
From the perspective of Worldpay shareholders, we like the deal. At current prices, the combination of FIS shares and cash offered equates to about $112 per share, which represents a healthy 20% premium to our $93 stand-alone fair value estimate. FIS stated it expects to realise $700 million in synergies, which provides some rationale for the premium. From a strategic perspective, we remain somewhat sceptical about the value created in combining bank technology and acquiring businesses.
Certainly, historically, there has always been some overlap, and therefore a loose strategic fit. Banks have always been referral partners for acquirers, and some large banks operate their own acquiring businesses. In fact, Worldpay operates a small business that provides debit card processing and other services to banks, as it helps Worldpay develop bank relationships. However, as acquiring has become more commoditised, the industry has trended toward integrating acquiring into more holistic business software offerings and developing omnichannel offerings.
We don’t see bank technology providers as being positioned to material aid in this effort, given that they focus on serving banks. Further, in our view, Worldpay had adapted to this shift adequately on its own and had sufficient resources to keep up with this trend. Therefore, we don’t see the combination as materially strengthening its competitive position. We think the attraction for the bank technology companies might simply be the higher secular growth the acquiring industry offers. We don’t see any major roadblocks to the completion of this deal, and therefore expect to raise our fair value estimate for Worldpay to reflect the value offered by the FIS deal.
Worldpay Builds Scale to Serve Large Retailers
Worldpay, formerly RBS Worldpay, was spun out from FTSE 100 bank Royal Bank of Scotland (RBS) in 2010, but RBS retained a 20% stake until late 2013. Worldpay listed on the London Stock Exchange in January 2015 until it was bought by Vantiv in late 2017, and the deal completed in early 2018.
Payment processing of any type is a highly scalable business, as once a payment platform is established, there is little incremental cost to additional transactions. As a result, a handful of acquirers have come to dominate the industry over time. Recent mergers and acquisitions have further consolidated the space, and Worldpay has been at the front of this trend, with the early 2018 merger of Vantiv and Worldpay creating the largest standalone acquirer in the US, with about 23% market share.
Worldpay serves merchants across the size spectrum, but we believe it and the other leading merchant acquirers are the only ones with the scale to effectively serve large merchants. As a result of its scale and the resulting cost advantage, we believe a narrow moat – or small competitive advantage – surrounds Worldpay's business
