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First Data deal is justifiable stop along deleveraging path, analysts say


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First Data deal is justifiable stop along deleveraging path, analysts say

First Data Corp.'s acquisition of CardConnect Corp. may be a detour for the Atlanta-based company's deleveraging effort, but analysts say the deal makes sense overall.

At a November 2016 investor conference, First Data executives laid out a plan to reduce the company's leverage ratio to roughly 4x by 2019 compared to its then 6.2x level. The company defines its financial leverage as net debt to EBITDA.

The company has not been acquisitive in recent years. First Data went without making an acquisition from October 2015 to March 2017, when the company acquired Atlanta-based Acculynk Inc., which provides e-commerce solutions for debit card acceptance. In a May 30 note, BTIG analyst Mark Palmer cited a fall 2016 comment from First Data CFO Himanshu Patel, who said the company was not ruling out beneficial deals that would require an increase in leverage.

Credit Suisse analyst Paul Condra said the $750 million transaction does not put First Data significantly behind on its deleveraging schedule.

"I don't think it's a big setback," he said in an interview. "They're still generating enough cash to service this debt. I think we knew they would probably do some deals here and there."

But this deal may be larger than some expected, Condra added, and more deals of this size could hinder First Data's effort to deleverage.

"If you had a couple more of these, then I think you'd start to feel like the deleveraging piece is a little more at risk," he said. "They'd have to be really, really good acquisitions and there probably aren't that many out there that they could do. I don't think that would be too well received if they kept making acquisitions of this size."

First Data's story is maintaining low- to mid-single digit top-line growth and balancing its deleveraging effort, according to Barclays analyst Darrin Peller.

"While this deal may slightly prolong the deleveraging aspect, it may also shore up confidence around long-term growth potential, ensuring the stock's multiple at least holds steady or improves," Peller wrote in a May 30 note.

Palmer wrote that the deal could help First Data compete more effectively with payments peer Square Inc. He pointed out that CardConnect has made notable investments in technology, unlike its primary competitors. CardConnect is a long-time distribution partner of First Data and processes around $26 billion of volume each year from about 67,000 merchant customers.

In a May 30 note, William Blair analyst Robert Napoli suggested that a roughly $20-per-share purchase price would have been fairer than the $15-per-share cash price. The analyst also noted that the purchase price represents a valuation of 16.2x 2017 EBITDA and 13.4x 2018 EBITDA. The deal seems positive for First Data shareholders, Napoli added.

Condra said he thought CardConnect could have gotten a higher price as well. He pointed out that CardConnect's assets are attractive because they help First Data get exposure in the small-business space with a "technology-first" platform.

"Given the way that company is growing, I would have thought it might've fetched a higher price," Condra added. "They paid a lot, but given the growth and assets, I think it's fair."