Fidelity Information Services FIS
July 03, 2010 - 1:10pm EST by
mojoris
2010 2011
Price: 26.41 EPS $1.95 $2.25
Shares Out. (in M): 376 P/E 13.5x 11.7x
Market Cap (in $M): 9,925 P/FCF 10.8x 10.4x
Net Debt (in $M): 2,600 EBIT 975 1,100
TEV ($): 12,525 TEV/EBIT 12.9x 11.4x

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Description

 

Event Type:

Short Duration Value Catalyst/Broken LBO/Dutch Tender

Timing: ~45 Days

Trade Recommendation:

  • Long FIS stock, long October 35 conversions for the Company's early/mid-August $2.5bn "Dutch" tender with a tender price range of $29-31 per Company press release and slide presentation. Stock to conversion ratio set to result in a flat stock position post tender on our proration assumptions.
  • Current IRR yields ~ 20-35% including cost of conversions
  • ROR% provides the largest risk-adjusted arb spread with an early 3Q close with a much safer risk profile.

 

Overview / Entry Catalyst:

FIS announced on 5/26/10 that it intends to commence a $2.5bn recap with proceeds used to repurchase shares through a Dutch tender (minimum 21-22.6% of the total float at the min/max tender ranges).  Chronology prior to the tender announcement is below:

  • 5/7/10: WSJ reports that a Blackstone-led consortium is in discussions to acquire the Company at ~ $32/share (~ $14.8bn, 9.3x EBITDA, 16x eps)
  • 5/9/10-5/17/10: Numerous reports citing the largest shareholder, Warburg Pincus (10.8% holder via sale of Metavante to FIS in 2009) and TH Lee (4.38% holder), will not agree to low $30's price (David Faber of CNBC reported a price of $43/share).
  • 5/17/10: FIS announces it is exploring options to create shareholder value, including a recap and a buyout by a 3rd party
  • 5/25/10: FIS presents at Stephens conference and announces that buyout talks have ceased, announces $2.5bn tender with a range of $29-$31/share
  • 06/07/10: Debtwire reports that FIS meets with lenders to amend and extend its existing bank facilities to accommodate new HY raise and increase bank borrowings
  • 06/08/10: FIS presents at RBC Tech, Media, and Communications conference reiterating debt capital raise intentions and expectation that it will be completed by early/mid August.

 

Despite recent weakness in the HY markets, we believe the market will easily absorb a new $2.5bn offering for FIS:

  • FIS business is highly stable, sticky and predictable (14k clients, consistent organic revenue and earnings growth, high barriers and switching costs, largely insulated from financial reform legislation, 85% of revenues maintenance and processing, 16% international including Europe, Asia, LatAm)
  • Day one earnings accretion supports front and back-end valuation
  • Current leverage is de minimis and proforma leverage is moderate at 3.2x (7.9x interest coverage, no maturities)
 Edge/Variant View:
  • Proration and accretion analysis, FIS has previously recapped and de-leveraged the balance sheet
  • Management always open to creating value

Risk Protection

Four primary risks exist with this trade: (i) FIS decides not to complete the tender; (ii) proration assumptions are miscalculated, resulting in a net long or short position post tender; (iii) tender size is reduced and (iv) cost of new financing eliminates accretion.  We believe these risks are highly quantifiable and provide a strong risk/reward set up

  • HY markets, despite a slowdown in new issues, remain supportive for highly predictable businesses with reasonable leverage characteristics
  • Back end valuation reasonable at ~13x 2010 earnings. Single digit revenue grower with consistent and proven margin expansion
  • We believe the street would still applaud an accretion result of 5% or better which equates to a $1.75bn offering or $750m lower than announced. Under this scenario, participation increases thereby reducing the overall return, but backend valuation still results in a profitable trade
  • Highly accretive transaction (8%-10% accretive) under our base case ($2.5bn tender, 7% interest rate) with substantial inelasticity to interest rates on the new financing. Transaction remains earnings accretive to the back-end valuation with a 30% higher interest rate than we anticipate (+200 bps).

Exit Catalyst:

  • Tender completion or renewed LBO discussion

Tender Overview

As shown below, the proposed $2.5bn Dutch tender results in the repurchase of 86.2m shares at a $29 tender price.  Based on consensus estimates and our interest rate assumption for the proforma net debt at ~ 7%, the Day 1 earnings accretion ranges from 8% in a $31/share tender price to 10% under the minimum $29/share assumption. 

 

($ in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BACKGROUND / ASSUMPTIONS

 

 

FIS Equity

 

 

 

 

 

Last Price

 

 

 

 

 

 

 

 

 

 

 

 

 

Other information / assumptions:

 

 

  FIS price:

 

 

 

 

 $     26.55

 

FIS Common shares outst. (MMs):

      376.000

 

   Recent P/E (2010E):

 

 

 

        13.6x

 

FY10E share count

 

      382.200

 

Post-tender P/E (2010E)

 

 

        12.4x

 

FIS market cap ($m):

 

         9,498

 

 

 

 

 

 

 

 

 

Est. Dutch-tender shares (MMs):

86.207

 

 

 

 

 

 

 

 

 

Dutch-tender value ($m):

 

         2,500

 

   FIS price before announcement:

 

 $     24.85

 

PF Cash ($m)

 

              -  

 

   P/E (2010E) prior to announcement

 

        12.7x

 

Existing Debt  ($m)

 

         2,600

 

 

 

 

 

 

 

 

 

Interest income rate (estimated)

7.00%

 

 

 

 

 

 

 

 

 

Pro-Forma Leverage

 

3.2x

 

 

 

 

 

 

 

 

 

ACCRETIVE EARNINGS IMPACT (PRO-FORMA)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DUTCH TENDER RANGE

 

Assumed

 

 

 

 

 

 $29.00

 

 $30.00

 

 $31.00

 

 $29.00

 

 

 

 

 

 

 

 

 

 

 

 

 

Implied premium

 

 

 

9.2%

 

13.0%

 

16.7%

 

9.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

Tender value (mm)

 

 

 

 $2,500

 

 $2,500

 

 $2,500

 

 $2,500

 

 

 

 

 

 

 

 

 

 

 

 

 

2010E EPS estimate w/o self tender:

 

 $1.95

 

 $1.95

 

 $1.95

 

 $1.95

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior 2010E earnings estimate:

 

 

 

 $745

 

 $745

 

 $745

 

 $745

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional interest exp/lost income

 

 

 $175

 

 $175

 

 $175

 

 $175

 

After-tax impact at

37.0%

 

 

 $110

 

 $110

 

 $110

 

 $110

 

 

 

 

 

 

 

 

 

 

 

 

 

2010E back-end shares:

 

 

 

        296.0

 

        298.9

 

        301.6

 

        296.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted pro-forma 2010E EPS:

 

 

 $2.15

 

 $2.12

 

 $2.11

 

 $2.15

 

% Accretion

 

 

 

10.02%

 

8.97%

 

7.99%

 

10.02%

 

Applying the pre-tender P/E valuation to the back end (post tender) results in a $26.84-$27.34 share price.

 

VALUATION OF BACKEND

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DUTCH TENDER RANGE

 

Assumed

 

 

 

 

 

 

 

 $29.00

 

 $30.00

 

 $31.00

 

 $29.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted pro-forma EPS (back-end):

 

 

 $2.15

 

 $2.12

 

 $2.11

 

 $2.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Low multiple

 

12.0x

 

 $25.73

$25.48

 

$25.26

 

 $25.73

 

 

 

Mid multiple

 

12.7x

 

 $27.34

 

 $27.08

 

 $26.84

 

 $27.34

 

 

 

High multiple

 

13.5x

 

 $28.95

 

 $28.67

 

 $28.42

 

 $28.95

 

 

 Participation Analysis:

Current share holder roster is characterized by insiders and legacy PE holders (Warburg and THL), arbitrage accounts and other institutions, retail, and passive indexers.  A summary of our tender assumptions are as follows:

  • Institutions: 53% of shares outstanding, increasing build of arb accounts leading to ~ 43% of total shares tendered at the low-end tender price of $29 to capture a spread
  • Insiders (FNF & management), Warburg, & THL: 16.4% of shares outstanding, none of which should tender given prior rejection of Blackstone's $32/share bid
  • Passive indexers: 13.3% of shares outstanding, none of which tender at the $29/share low-end price given limited premium to current price levels
  • Retail: 17% of shares outstanding, 15-20% of which tender

In total, we believe the total proration will measure between 40%-60%, with a minimum proration of 22.6% and a midpoint of 50%.

 

 

 Est. shares

 

Percent

 

 Shares

 

 

 

Category (MMs)

 held

 

Tendered

 

 Tendered

 

% Held

 

TH Lee

           16.5

 

0.0%

 

0.0

 

4.31%

 

Warburg

           40.7

 

0.0%

 

0.0

 

10.65%

 

Directors and executives

             2.4

 

0.0%

 

0.0

 

0.62%

 

FNF

             3.2

 

0.0%

 

0.0

 

0.84%

 

Retail

           65.0

 

15.0%

 

9.8

 

17.01%

 

Passive Indexers

           51.0

 

0.0%

 

0.0

 

13.34%

 

Other

         203.4

 

80.0%

 

162.7

 

53.23%

 

Total

         382.2

 

 

 

172.5

 

100.00%

 

 

 

 

 

 

 

 

 

 

Shares tendered

         172.5

 

 

 

 

 

 

 

Shares to be bought back

           86.2

 

 

 

 

 

 

 

Pro-ration

50.0%

 

 

 

 

 

 

 

  

COMBINED VALUATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

DUTCH TENDER RANGE

 

Tender Price

 

 

 

 

 

 $29.00

 

 $30.00

 

 $31.00

 

 $29.00

 

 

 

 

 

 

 

 

 

 

 

 

 

At MIN pro-ration of:

 

22.6%

 

 

 

 

 

 

 

 

 

Value from tender

 

 

 

 $6.54

 

 $6.77

 

 $6.99

 

 $6.54

 

Value from backend

 

 

 

 $21.17

 

 $20.97

 

 $20.78

 

 $21.17

 

Total value

 

 

 

 $27.72

 

 $27.74

 

 $27.78

 

 $27.72

 

Current price

 

 

 

 $26.51

 

 $26.51

 

 $26.51

 

 $26.51

 

Difference

 

 

 

 $1.21

 

 $1.23

 

 $1.27

 

 $1.21

 

Raw percentage

 

 

 

4.5%

 

4.6%

 

4.8%

 

4.5%

 

At MAX pro-ration of:

 

50.0%

 

 

 

 

 

 

 

 

 

Value from tender

 

 

 

 $14.49

 

 $14.99

 

 $15.49

 

 $14.49

 

Value from backend

 

 

 

 $13.68

 

 $13.55

 

 $13.42

 

 $13.68

 

Total value

 

 

 

 $28.17

 

 $28.54

 

 $     28.92

 

 $28.17

 

Current price

 

 

 

 $26.51

 

 $26.51

 

 $26.51

 

 $26.51

 

Difference

 

 

 

 $1.66

 

 $2.03

 

 $2.41

 

 $1.66

 

Raw percentage

 

 

 

6.3%

 

7.7%

 

9.1%

 

6.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

At pro-ration of:

 

40.0%

 

 

 

 

 

 

 

 

 

Value from tender

 

 

 

 $11.60

 

 $12.00

 

 $12.40

 

 $11.60

 

Value from backend

 

 

 

 $16.40

 

 $16.25

 

 $16.10

 

 $16.40

 

Total value

 

 

 

 $28.00

 

 $28.25

 

 $28.50

 

 $28.00

 

Current price

 

 

 

 $26.51

 

 $26.51

 

 $26.51

 

 $26.51

 

Difference

 

 

 

 $1.49

 

 $1.74

 

 $1.99

 

 $1.49

 

Raw percentage

 

 

 

5.6%

 

6.6%

 

7.5%

 

5.6%

 

IMPLIED CREATION OF BACK-END (* also refer to worksheet below)

 

 

 

 

 

 

 

 

 

DUTCH TENDER RANGE

 

Assumed

 

 

 

 

 

 $29.00

 

 $30.00

 

 $31.00

 

 $29.00

 

 

 

 

 

 

 

 

 

 

 

 

 

At MIN pro-ration of:

 

22.6%

 

 $25.77

 

 $25.48

 

 $25.19

 

 $25.77

 

 

 

 

 

 

 

 

 

 

 

 

 

At MAX pro-ration of:

 

50.0%

 

 $24.00

 

$23.00

 

$22.00

 

$24.00

 

 

 

 

 

 

 

 

 

 

 

 

 

At pro-ration of:

 

40.0%

 

 $24.83

 

 $24.17

 

 $23.50

 

 $24.83

 

Trade Set Up

Based on our tender assumptions and resulting back-end valuation, a current, "risk-free" spread of 2-4% is created, leading to a 20-35% IRR (including conversions, based on a mid August close). 

 

TENDER BACK-END WORKSHEET

ex cost of conversion

 

 

 

 

 

 

 

 

 

Buy FIS at

 

 $26.47

 

 

 

 

 

 $26.47

 

 

 

 

 

 

 

 

 

 

 

 

 

Tender 100% and get

 

50.0%

 accepted at

 

 $29.00

 

 $14.49

 

 

 

 

 

 

 

 

 

 

 

 

 

Back end value

 

 

 

 

 

 

 

 $11.98

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares returned

 

 

 

 

 

 

 

50.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Price per back end share

(***Implied back-end value)

 

 

 

 $23.94

 

 

 

 

 

 

 

 

 

 

 

 

 

Back end valuation

 

 

 

 

 

 

 

 $27.34

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit =

 

 $27.34

-

 $23.94

*

50.0%

=

 $1.70

 

 IRR

 

 

 

 

 

 

 

 

 

 

 

Return

 

 

 

 

 

 

 

6.4%

 

51.38%

 Probability Analysis:

As illustrated below, assigning a probability weighted price (assuming zero net exposure on back-end on tender scenarios) yields a range of $28.49-$30.14 (7%-14% above current levels) and an IRR range of 56%-112%.

 

       

Average

 

Scenario

Price

Weight

 

P/E

Price

Weight

 

Tender Pulled

$23.50

2.5%

$0.59

12.3x

$24.50

2.5%

$0.61

Tender Delayed

$25.50

10.0%

$2.55

13.2x

$26.00

10.0%

$2.60

Reduced Tender ($1.75bn)(1)

$28.00

17.5%

$4.90

14.6x

$29.00

17.5%

$5.08

Tender Close as Planned

$29.00

65.0%

$18.85

15.4x

$31.00

65.0%

$20.15

LBO

$32.00

5.0%

$1.60

16.9x

$34.00

5.0%

$1.70

               

Total

 

100%

$28.49

   

100%

$30.14

               

Current Price

   

        26.49

     

26.49

 1. We do not anticipate a reduction in the tender range on a smaller offering. However, to incorporate the lower EPS accretion on a smaller offering (~ 5% vs. 10%, resulting in a ~ $1/share reduction in back end valuation) we illustrate the probability range of $28-$30 above.

Summary

FIS represents a compelling risk/return profile that is largely isolated from daily market volatility ahead of the tender launch.  While the trade is still subject to the successful bond launch, the Company has a long history of creating shareholder value and represents a highly attractive debt issuer given its sticky and recurring revenue base.  Trading at a 20-35% rate of return with a reasonable valuation and quantifiable downside risk represents a solid investment in a highly volatile trading environment.

Catalyst

1. Definitive tender docuement filed (SC TO-I). Should provide LBO discussion background, conditions to the tender, and other important details. This should also provide comfort that the company is committed to moving forwards and creating value for all shareholders.
 
2. Completion of the tender in early / mid August
 
3. Recapitalization: tender, special dividend, PE minority buyout
 
4. Leveraged Buyout / Go-private transaction
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