By Niket Nishant, Anirban Sen and Milana Vinn
(Reuters) -Banking and payments processing conglomerate Fidelity National Information Services Inc took a $17.6 billion write-down on its merchant business as it unveiled plans on Monday to spin it off, undoing a $43 billion acquisition that went sour.
FIS built its merchant business, which processes transactions for companies, on the back of its $43 billion purchase of Worldpay four years ago. New financial technology startups have since eroded its market share and challenged its profitability.
FIS said in the statement it planned to spin off Worldpay in the next 12 months into a separate company that will be owned by its shareholders on a tax-free basis, confirming a Reuters report published on Friday.
Shares of FIS, which have lost more than half their market value since the company bought Worldpay, closed down 12.5% at $66 on Monday, giving it a market capitalization of about $39 billion.
FIS, which has been under pressure to explore strategic options from activist investors D.E. Shaw Group and Jana Partners, also forecast 2023 profit below market estimates on Monday. FIS forecast 2023 profit between $5.70 and $6 per share, much below analysts' expectations of $6.57 per share, according to Refinitiv IBES data.
Last year, D.E. Shaw and Jana urged FIS to undertake a review of its operations, pointing to a significant discount in its share price to peers such as Fiserv Inc (NASDAQ:FISV) and Global Payments (NYSE:GPN) Inc. Jana also pushed the company to accelerate previously announced changes to its top management.
FIS caved into the activists' demands in December when it unveiled a wide-ranging strategic review of its operations and named Stephanie Ferris as the new leader of the company, replacing Gary Norcross, who spearheaded the Worldpay acquisition.
Charles Drucker, the former CEO of Worldpay, will lead the merchants business after it is spun out, FIS said. Ferris and Drucker have worked together closely for several years, going back to the early 2000s when they first crossed paths at Fifth Third Bancorp (NASDAQ:FITB).
Drucker, a long-time veteran of the financial services industry, previously also worked at the Fifth Third spin-off Vantiv, and then at Worldpay after it merged with Vantiv. He played a key role alongside Ferris in selling Worldpay to FIS in 2019, leaving the company shortly after the deal closed.
On a conference call with analysts, CEO Ferris said the separation would free up Worldpay to pursue growth strategically through more M&A - something the unit was unable to do under the FIS umbrella as its business was inextricably tied to the parent company.
"We do believe having a different capital allocation for that business will enable M&A that we just cannot feed it inside the (FIS parent),” said Ferris.
Some analysts questioned the decision to carve out Worldpay, blaming FIS' woes on the poor integration of the merchant business rather than the logic of the combination.
"FIS’ recent issues stem more from operational missteps and that the strategy behind the combination was not necessarily flawed from a long-term perspective," Morningstar analysts wrote in a note to clients on Monday.
FIS, which was started in 1968 and counts big corporations in the financial services industry as its customers, has cut thousands of jobs since the review was launched and plans to deliver costs savings of $1.25 billion as part of the broader efforts to reshape the business.
The separation of Worldpay would leave FIS with a core processing systems business, enabling transactions among banks and other financial institutions, as well as its capital markets division serving investment firms.
"On the positive side, following the spinoff, FIS will return to being primarily a bank tech provider. This business while lower growth, is relatively predictable and stable, and we believe this segment has the strongest moat among FIS’ businesses," Morningstar added.
FIS follows other large conglomerates, including General Electric (NYSE:GE) Co, Johnson & Johnson (NYSE:JNJ), Kellogg (NYSE:K) Co and Toshiba (OTC:TOSYY) Corp, who have broken up their sprawling empires over the past few years amid pressure from investors to become leaner and focus on enhanced profitability in some of the core businesses.
In a separate statement, Jana Partners backed FIS' move to spin out Worldpay.
"We welcome the decisive actions taken by the company and believe separating the merchant business with Charles Drucker as CEO, increasing savings targets, and aligning compensation with performance are the right steps to unlock shareholder value," said Scott Ostfeld, managing partner at Jana Partners.