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Analysts see largest fintech merger of all time as 'defensive' play

A Fidelity National Information Services Inc.-Worldpay Inc. combination would create a new giant in the global fintech space, but analysts see the deal as a maneuver to build scale in the face of another megamerger announced just two months ago.

In January, the fintech industry saw an announced deal between Fiserv Inc. and First Data Corp. valued at $21.79 billion. That move was certain to set off more M&A as Fiserv's competitors moved to contend with the new heavyweight, analysts said. But few saw what would be a $35.34 billion purchase of Worldpay — fresh off a massive acquisition of its own — coming for Fidelity National, commonly referred to by its stock ticker FIS.

"This looks like more of a defensive move or a strategic response to Fiserv's pending acquisition of First Data," Wedbush analyst Moshe Katri said in an interview. MoffettNathanson analyst Lisa Ellis said PayPal Holdings Inc.'s recent $750 million investment into Latin America's e-commerce giant MercadoLibre Inc. was also a catalyst for the deal. In a March 19 research note, Ellis characterized the deal as "reactive" rather than defensive.

Executives said they had been considering a deal like this for much longer.

"We've been watching Worldpay for a number of years," FIS President, Chairman and CEO Gary Norcross said on a call to discuss the deal. He said the merger came down to timing, and that it was the right time for the two companies to combine. The cash-and-stock deal, which S&P Global Market Intelligence valued at $35.34 billion, is now the largest deal on record for the fintech sector. That price tag excludes the assumption of Worldpay debt that FIS expects to refinance.

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The broader payments landscape is like a huge chessboard, Ellis said in an interview. And major players like Fiserv and FIS have likely been thinking through possible moves for a while now.

"I would presume most combinations of all different flavors and sizes have been considered previously," Ellis said. But the FIS-Worldpay merger differs from the Fiserv-First Data tie-up in that it combines two leading players in adjacent industries rather than consolidates scale in a single part of the payments ecosystem.

FIS was expected to respond to Fiserv's merger announcement because the companies are the country's two largest issuer processors, or companies that process payments for consumer banks. Just six names — FIS; Fiserv; Total System Services Inc., commonly referred to as TSYS; First Data; Jack Henry & Associates Inc.; and Worldpay — hold about 90% of total market share. But the choice of Worldpay was surprising, analysts said.

Worldpay is still integrating its last major merger. Its predecessor company, Vantiv Inc., closed its acquisition of Worldpay Group PLC and took on the latter's name and branding in early 2018. Many investors expected FIS to pursue TSYS, but FIS "went big" in targeting Worldpay, Wedbush's Katri said, adding that the company "went the extra mile" to respond to the Fiserv-First Data deal.

"TSYS would've helped them strategically get that merchant processing business, but Worldpay gets them that global reach, and it gives them a significant amount of scale," he said.

It is unclear if FIS pursued other targets before coming to Worldpay, or if the two companies had already been planning to merge. Nomura analyst Dan Dolev said TSYS may not have wanted to sell at the price that FIS was willing to pay. The price tag for Worldpay represents a slight upside to its closing price on March 15 but is a discount to the company's valuation earlier in 2018.

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On the call to discuss the merger, executives highlighted a focus on e-commerce and international expansion as driving forces behind the combination.

"E-commerce is moving fast," Worldpay Executive Chairman and CEO Charles Drucker said. FIS can accelerate Worldpay's expansion into high-growth markets, and the company "wanted to take advantage of that now, not two [or] three years later," he said.

With the acquisition, Worldpay can accelerate its global international business since FIS already has presence in 130 countries. Worldpay's international business — meaning its business outside of the U.S. and the U.K. — is currently 16% of the company's total revenue and is growing at about 24% annually, MoffettNathanson's Ellis said. With FIS' global footprint, it can grow even faster.

But Ellis said the benefits for FIS are even greater. Acquiring Worldpay launches the company into merchant acquiring, a related but separate vertical and that sees much higher growth than issuer processing.

"Worldpay is a leading player in a higher-growth market with very differentiated capabilities around e-commerce, which is an even higher-growth subcomponent of the market," Ellis said. "For FIS, as a player that's a market leader but currently trapped in relatively mature, lower-growth markets within the world of fintech and payments, it's a very attractive asset."

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